Bank of England to keep interest rates on hold

The Bank of England is expected to keep its key interest rate at a record-low 0.5 per cent today as it mulls the impact of the government's austerity measures on Britain's fragile economic recovery.

The central bank's monetary policy committee is predicted by most economists to hold its key lending rate after a two-day meeting despite stubbornly high inflation that sparked dissent from one policymaker last month.

Britain's coalition government last month delivered a deficit-slashing emergency budget which contained a package of higher taxation and spending cuts amid intense concern about soaring state debt levels in Europe.

"The risks to a still-fragile UK recovery coming from the intensified tightening of fiscal policy that will increasingly kick in ... mean that most members of the MPC are likely to maintain the view that it is premature to raise interest rates despite persistently above-target and sticky consumer price inflation," said IHS Global Insight economist Howard Archer.

Archer said the policymakers would also anticipate that the budget measures "could negatively impact on consumer and business behaviour".

The economy clawed its way out of a record-length recession late last year but market concerns remain over the potential of a so-called "double dip" or second phase of economic downturn.

Last month, a single MPC policymaker voted to lift hike the central bank rate to 0.75 per cent, according to minutes from the June 10 gathering.

Andrew Sentance argued that an increase was necessary due to a spike to inflation, the first time for almost two years that an MPC member had voted for tightening.

In the event, the MPC voted 7-1 to keep borrowing costs at 0.50 per cent. "The MPC is getting increasingly nervous about the current rise in inflation, as evidenced by Andrew Sentance's vote for an interest rate rise last month," said Capital Economics economist Vicky Redwood.

"However, most members still seem prepared to wait and see if the spare capacity in the economy starts to pull inflation back down."

Worries persist about inflation, which softened in May but held above the BoE's government-set target of 2.0 per cent.

Consumer Price Index 12-month inflation, the government's target measure, fell to 3.4 per cent in May from a 17-month peak of 3.7 per cent in April, official data showed.