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Bank of England holds rates at 0.5%

Interest rates could remain low until 2011, claim some experts, although inflationary fears continue to stalk the economy.

The Bank of England today held interest rates at 0.5% for the 12th month.

The Monetary Policy Committee (MPC) said the rate freeze would continue and added the hold on quantitative easing would remain.

So far the MPC has created £200bn of funds to buy largely government bonds and some corporate bonds.

Uncertainty remains over what the effects of the £200bn quantitative easing programme would have on the economy, with MPC members warning the full effects could take over a year to hit.

Robert Sinclair, director of the Association of Mortgage Intermediaries (AMI), said: “With the general election now imminent, the MPC has, unsurprisingly, maintained its position.

“Economic recovery remains weak and we wait to see if further stimulus via quantitative easing is required.”

He added there was little evidence for rates to increase: “An extended period of low interest rates is now looking more and more likely, with an extension to quantitative easing a better bet than a withdrawal of the recent monetary stimulus.”

After the election, whichever party wins, taxes will have to rise to balance the government’s books. This will allow interest rates to remain low, some experts claim.

Ben Thompson, Legal & General director of mortgages, said: “Political forces will significantly influence the overall economic picture this year - we've got an election coming up and inevitable tax hikes to tackle the gargantuan government debt.

“This will hit the pockets of British families, tempering their spending and allowing the MPC to maintain rates at a low level for some time yet.”

He added: “The lurking threat is inflation though. The Bank of England expects inflation to remain high for several months but only temporarily so. There are some signs that inflationary pressure may build up over the course of this year and next year, though.”

The Bank currently expects inflation to drop back from the current levels of 3.5% to around 2%.

However, if inflation remains high, interest rates will have to start rising.

The Bank of England has a target of 2% for the consumer prices index measure of inflation.