Bank of England holds rates at 0.5 per cent

The Monetary Policy Committee held rates at 0.5 per cent in January, in its first decision of 2010.

Azad Zangana, European economist at Schroders said: “Like the rest of the UK, the MPC remains frozen in wait and see mode voting to hold interest rates yesterday at 0.5 per cent. It also opted to continue its quantitative easing programme, which is on target to end in February, with the Bank of England purchasing GBP 200bn of Gilts.

Signals are getting stronger that the UK exited recession during the final quarter of 2009, with particularly strong readings from private business surveys and continued gains in house prices.

Inflation is expected to rise sharply over the coming months as energy price base effects from last year unwind and the impact of VAT reinstated at 17.5% feed through. UK consumer prices have been rising faster than most advanced countries, though this is mostly due to the weakness in Sterling last year.

Zangana said: “Nevertheless, we agree with the Bank of England's view that short-term inflationary pressures are temporary and we expect inflation to fall back towards the end of the year. Rising unemployment and pressure on households to reduce debt coupled with inevitable fiscal tightening should dampen demand and economic activity this year.”