Bank keeps rates at 0.5%

The Bank of England has again held rates at 0.5% amid signs the economic recovery is failing to gather momentum.

In a widely expected move, the Monetary Policy Committee's (MPC) decision to keep rates at historical lows comes on the back of a spate of downbeat economic data. Today's decision marks the 26th consecutive month rates have remained unchanged.

The Bank also kept its quantitative easing programme at £200bn.

Shortly before the MPC released its decision, the FTSE 100 was down 0.8% to 5933 and following the announcement the index dropped to 5922, down 1%.

Disappointing GDP growth figures for Q1 - which showed the economy grew just 0.5% after a 0.5% contraction in Q4 - along with negative data coming from the construction, manufacturing and home lending sectors have served to highlight the fragile state of the economy.

This week, the influential Institute of Directors and the British Chambers of Commerce both called on the nine-member MPC to hold rates amid the gloomy backdrop.

"Aside from the fact that inflation has fallen and the economy, at best, is flatlining, the majority of the MPC instinctively understands that raising rates at the current time could send already delicate consumer confidence into freefall," said Dragonfly Property Finance CEO Jonathan Samuels.

Today's MPC gathering marked super-hawk Andrew Sentance's final meeting. His departure could now tilt the balance of power even more towards the committee's doves.

Prior to the decision, markets were betting against a rise in the cost of borrowing with UK government bonds rising and the pound falling to its lowest in more than a year versus the euro.

Economists are now pencilling in a rate rise for the end of the year - despite May previously being touted as the turning point when the committee would hike rates.

Today's decision means Bank governor Mervyn King and his fellow doves have again won the day. Earlier this week, King said the nation's high debt levels pose significant economic challenges which would only be heightened by an increase in the base rate.

The governor has also consistently argued high inflation is a temporary phenomenon caused by external factors such as rising global commodity prices. The CPI index of inflation dropped from 4.4% to 4% in March. However, the figure is double the Bank's target and well above OECD area average of 2.7%.

Minutes from the MPC's April meeting revealed the committee was again divided six-three against a rate rise. Whilst six members voted to keep rates at 0.5%, Andrew Sentance favoured a 0.5% hike as Spencer Dale and Martin Weale pressed for a rise of 0.25%.

Meanwhile, the European Central Bank (ECB) has held interest rates at 1.25%. Last month, the ECB hiked rates from 1% to 1.25% - the first increase in nearly three years. All eyes will now be on ECB President Jean-Claude Trichet to see whether he indicates a near term future hike in rates.