Bank holds interest rates at 0.5%

The Bank of England has kept interest rates on hold at the record low of 0.5% and has decided not to expand its £175 billion cash injection programme for the economy.

At its latest two-day meeting, the Monetary Policy Committee (MPC) voted to retain the quantitative easing (QE) programme at its current level despite fears about UK's fragile recovery from recession.

Following an unexpected 1.9% fall in manufacturing output during August after two months of growth, rate-setters were urged to increase the aid to at least £200 billion.

However, most analysts had predicted that the MPC was likely to wait until it reviewed the policy again next month with the help of the Bank's latest inflation forecasts.

The committee is weighing up mixed signals on the economy, with recovering house prices and stock markets contrasting with worse-than-expected figures for manufacturing.

Although the wider economy is expected to return to growth between July and September after five quarters of recession, the Bank's preferred measure of money supply showed sluggish growth during August - casting doubt on whether the QE policy was working.

Alongside its call for a QE increase, the British Chambers of Commerce has pressed the MPC to cut the rate at which financial institutions leave money on deposit at the Bank, to encourage lending in the wider economy.

The MPC is worried that the lingering problems in the financial sector will hamstring a recovery while banks repair their damaged balance sheets. The minutes of its September meeting said there could be "false dawns" for the economy.

The committee is charged with keeping inflation at 2% but its Consumer Prices Index benchmark - currently at 1.6% - has not fallen as quickly as expected, due to factors such as the slimmer chances of lower gas and electricity bills as well as the weakness of the pound.

The stickiness of inflation is likely to have kept the majority of the MPC from pushing for more stimulus measures for the economy, despite a push from governor Mervyn King and two others on the committee for a £75 billion boost to QE during August.

Graeme Leach, chief economist at the Institute of Directors, said the Bank of England was in "wait and see" mode.

"Sterling weakness and quantitative easing are a potential threat to the inflation target, but the size of the output gap and continued balance sheet adjustment in the household and corporate sectors provides a significant down-force as well."

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