Interest rates held at 0.5%

The Bank of England’s rate-setting committee has voted to hold interest rates at their historic low of 0.5%, while also keeping the Asset Purchase Programme at £200 billion, as expected.

The bank is juggling the need to check above-target inflation, which could be tackled with a rate rise, with the need to prevent the economy from falling back into recession.

However inflation has fallen from its peak and members of the Monetary Policy Committee have been outspoken in playing down the long-term impact of price rises.

On the other hand, the economy faces threats from overseas, as well as the domestic austerity measures and spending cuts being put in place by the coalition government. In addition to countering these threats, the Bank of England believes a weak pound will help boost demand for UK goods overseas. A rate rise would make the pound relatively more attractive.

Only MPC member Andrew Sentance voted for a rate rise at the last meeting. He believes inflation has been persistently higher than forecast because the Bank of England has misunderstood what has been driving prices higher and has overestimated the downward pressure on prices.

Most commentators agree that it will be next year before the Bank raises rates. This means savers’ cash will continue to languish in low interest accounts, while mortgage borrowers can continue to benefit from relatively low rates.

The European Central Bank is due to make its own interest rate decision today, followed by a key statement by bank president Jean-Claude Trichet. While the bank was expected to keep rates on hold, lingering concerns about the eurozone banks will take precedence when Trichet faces question from the press. Results on stress testing of the banks are due on 23 July.