The Bank of England kept interest rates at a record low of 0.5 per cent today as widely expected, ahead of the new government's June 22nd budget which will detail the extent of fiscal tightening faced by Britain.
Most analysts expect no change in monetary policy until the end of this year at the earliest as the central bank seeks to offset sharp government spending cuts and fall-out from the euro zone debt crisis.
The Monetary Policy Committee - comprising only eight of the usual nine members until a replacement is found for Kate Barker, whose term ended last month - also kept its asset-buying target at £200 billion (€243 billion), having put it on hold four months ago.
A spike in consumer price inflation to almost double the central bank's 2 per cent target has triggered some concerns among policymakers, raising the risk it may start tightening policy sooner than most people think.
However, the central bank believes price pressures will be short-lived and that the large degree of slack in Britain's economy resulting from its deepest downturn since World War Two, will help inflation return to target before the year is out.
Economic recovery has been relatively muted, with GDP growing by just 0.3 per cent in the first three months of this year, slower than the 0.4 per cent achieved at the end of last year and weaker than the Bank of England had initially forecast.
And there are fears that mass lay-offs in the public sector, which employs a fifth of Britain's workforce, could prompt a renewed weakening in the second half of the year.
Conservative finance minister George Osborne has pledged to cut the country's budget deficit, currently almost 11 per cent of GDP, at a "significantly accelerated" pace, starting with £6 billion of cuts this year.
His first budget later this month is expected to contain a mix of spending cuts and tax rises that could have a profound impact on both growth and inflation.
Reuters