Interest rates held at record low

The Bank of England has kept interest rates at their record low of 0.5% despite warnings that inflation could rise to 5% in coming months.

The vote by the Bank's nine-strong committee is likely to have been finely balanced after pressure for higher rates intensified in recent weeks.

Policymakers last changed the borrowing rate in March 2009 but the CPI measure of inflation rose to 3.7% in December - well above the Bank's 2% medium-term target - and governor Mervyn King has warned it could hit 5%.

Business leaders applauded the Bank's decision and said any change in borrowing costs would jeopardise the UK's faltering recovery, particularly after economic output contracted by 0.5% in the final quarter of 2010.

With 68% of mortgage lending being at variable rates, the decision will also be welcomed by many homeowners, who continue to enjoy low levels of repayments.

The Bank's Monetary Policy Committee (MPC) also voted to keep its programme of quantitative easing, or money printing, unchanged at £200 billion to encourage growth.

Lee Hopley, an economist at manufacturing employers' organisation EEF, said an increase in rates would have done little to alter the path of inflation in the short term, which is being driven by higher commodity prices and taxes.

She said: "The contraction across the economy in the final months of 2010 may well have been a blip, but as the bigger risk now appears to be growth, the Bank should continue to hold steady until the picture becomes clearer and the economy is firmly back on an upward track."

The CBI business lobby group said it expected rates to rise in the second quarter of 2011 as inflationary pressures intensify.

CBI chief economic adviser Ian McCafferty said: "This announcement to keep rates the same is not a surprise, but with more MPC members showing their concerns about inflationary pressures, the Bank is in the process of shifting its stance."