Interest rates: Bank of England holds steady

Interest rates were kept at their historic lows. Critics say the Bank of England should raise interest rates to battle stubborn inflation.

Toby Melville/Reuters
A man passes the Bank of England in the City of London February 10, 2011. The Bank of England defied critics and kept its key interest rate at a record low on Thursday, judging that the threat from rising inflation will prove temporary and that recovery remains in doubt.

The Bank of England held its base interest rate at 0.5 percent on Thursday despite increasing worries about the nation's stubbornly high inflation.

The Bank's Monetary Policy Committee dropped the rate to that all-time low in March of 2009 and has kept it there as a stimulant to economic recovery.

The MPC also voted for no additional stimulus through its program of asset purchases, known as quantitative easing, which pumped 200 billion pounds ($320 billion) into the economy between March and November of 2009.

Annual consumer price inflation rose to 3.7 percent in December, spurring calls for action to push the rateback to the government's official target of 2 percent. High rates help contain inflation, but can also dampen economic activity by raising borrowing costs for businesses and individuals.

Concerns about growth rose after a surprise drop of 0.5 percent in fourth-quarter GDP indicated that Britain's economic recovery may be less robust than hoped.

Interest now will focus on minutes of the MPC to be released later this month, which will show how many over the nine members voted to raise the rate. Last month, member Martin Weale joined Andrew Sentance for the first time in supporting a rise to 0.75 percent.

In a speech last month, Bank of England Governor Mervyn King said he expects inflation to rise perhaps as high as 5 percent before retreating.

He argued that a hike in interest rates would do little to restrain inflation, which he said is driven by external pressures including higher energy and commodity prices.

"Monetary policy cannot be based on wishful thinking," King said. "So unpleasant though it is, the Monetary Policy Committee neither can, nor should try to, prevent the squeeze in living standards, half of which is coming in the form of higher prices and half in earnings rising at a rate lower than normal."

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