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Bank of England will keep interest rates at 0.5% 'beyond next year'

THE Bank of England's Monetary Policy Committee (MPC) has decided to keep interest rates at the record low of 0.5%, with economists predicting they will stay there beyond next year.

The MPC decision was not a surprise as governor Mark Carney has repeatedly said the Bank will not consider raising rates until unemployment is below 7%.

Mr Carney and other MPC members have said that the 7% level will act as a level to review whether rates should rise rather than an automatic trigger.

With unemployment at 7.6% and the consumer prices index measure of inflation at 2.2% many believe there is little pressure on the bank to hike rates yet in spite of encouraging economic data.

Strong PMI surveys for construction, manufacturing and services this week have strengthened the likelihood of GDP growing in the fourth quarter by more than the 0.8% it rose by between July and September.

The decision by the MPC yesterday meant rates have been kept at 0.5% since March 2009.

The committee also kept the quantitative easing programme unchanged at the £375 billion it has been at since the middle of last year.

Howard Archer, economist at IHS Global Insight, said: There was never any doubt that the Bank of England would leave all aspects of monetary policy unchanged at its December MPC meeting and this duly proved to be the case.

"Indeed, the odds still favour interest rates staying at 0.5% all through 2014 despite the Bank of England's more optimistic view of the growth outlook and expectations that the unemployment rate will get down to 7% early in 2015, and possibly even in late 2014. 

"While interest rates will probably start rising in 2015, this may still not happen until well into the year. Our current view is the Bank of England will start to raise interest rates gradually from the third quarter of 2015."

Mr Archer believes any further quantitative easing is unlikely unless there is a "major relapse" by the economy in the coming months.

The European Central Bank also kept its rates on hold at a record low of 0.25%.

A pick-up in inflation and a drop in unemployment eased pressure on the bank to act again.

The decision to leave rates unchanged was expected.

It held the rate it pays on bank deposits at 0% and also left unchanged its marginal lending facility - or emergency borrowing rate - at 0.75%.

The central bank cut rates a month ago after euro zone inflation tumbled to 0.7% in October. That rate picked up slightly to 0.9% in November, though remained well below the ECB's target of just under 2%.

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