The Bank of England kept interest rates at a record low on Thursday, springing no surprises as growing signs of economic weakness at home and abroad outweighed concern about above-target inflation. The central bank''s decision means that rates will stay at 0.5 percent for a 27th consecutive month, and most economists do not expect rates to rise until the end of the year.
The BoE is taking a gamble that drags on growth from government spending cuts and a possible weakening in overseas demand will prove to be more persistent than upward pressures on inflation from rising commodity prices. "For now at least most committee members are prepared to hold fire on interest rates to give the economy more of a chance to develop forward momentum," said IHS Global Insight economist Howard Archer.
Money markets only fully price in a rate rise for May 2012 - a sharp reversal from bets on a May 2011 rate rise which were widespread three months ago. Inflation is running at 4.5 percent and higher utility bills are likely to push it to 5 percent later this year, but the BoE forecast last month that it will fall back to target by early 2013 even if rates stay on hold for most of this year.
Economic output has essentially flatlined over the last three months of 2010 and the first three of 2011. Economists expect BoE minutes on June 22 to show a 7-2 split in favour of keeping rates on hold. BoE chief economist Spencer Dale and external member Martin Weale are likely to have stuck with their call to raise rates by 25 basis points. But new MPC member Ben Broadbent - who replaces arch-hawk Andrew Sentance - is not expected to follow his predecessor''s rate hike call.