Bank set to hold interest rates

The Bank of England extending its stimulus programme to £175bn last month

The Bank of England is widely expected to hold interest rates at 0.5% for the sixth month in a row, when it announces its decision later.

It is also likely to maintain its programme of pumping money into the economy - called quantitative easing - but is not tipped to extend it.

Recent data has suggested that the UK has begun to climb out of recession.

But the Bank has warned recovery is not assured and that it will take months for its policies to have full impact.

Stagnation

Optimism about the outlook for the UK economy has pushed the FTSE 100 index above 5,000 points for the first time since October 2008.

Official data recently showed UK manufacturing output rose at its fastest rate in 18 months in July.

This week, respected researchers the National Institute of Economic and Social Research said the UK economy grew 0.2% in the three months to August.

One must now question the conventional view that cutting rates below 0.5% will not help David Kern British Chamber of Commerce Will UK interest rates go negative? Former rate-setter turns on Bank

But it said that a return to growth should not be confused with a "return to normal economic conditions".

"There may well be a period of stagnation now, with output rising in some months and falling in others," the institute said.

Economy boost

The Bank's Monetary Policy Committee (MPC) last month increased the size of the quantitative easing program by £50bn to create up to £175bn on the UK's balance sheet by, in effect, printing money.

And three of the nine-member committee, including the Bank's governor Mervyn King, voted last month for an increase, to £200bn.

However, IHS Global Insight economist Howard Archer said that developments over the past month were "unlikely to lead to at least two of the other six MPC members changing their mind at this stage and voting for more quantitative easing".

The bank cut interest rates to a record low of 0.5% in an attempt to boost lending in the economy.

And there have been calls for the rates to be cut to less than zero in order to dissuade banks from holding onto the cash being pumped into the economy and lend it to individuals and companies instead.

"One must now question the conventional view that cutting rates below 0.5% will not help," said BCC chief economist David Kern.

The aim of quantitative easing is to encourage individual banks to expand their balance sheets - moving their reserves into something that offers a higher return, such as making new loans - and so increasing the supply of money in the economy.

A former Bank of England rate-setter has criticised the Bank for not spotting the recession and then not acting decisively enough to avoid it.

David Blanchflower reserves particular criticism for Mr King, in an article published in Thursday's New Statesman magazine.

He says Bank members lack the practical experience necessary to set policy.