Comment & Analysis

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The Bank of England has announced its decision to hold the base rate of interest at 0.5% for the fourth month in a row.

But the Monetary Policy Committee surprised markets by opting against creating more money to pump into the economy through its quantitative easing (QE) programme.

The Bank has already created over £100bn through the scheme and has permission from the Chancellor to boost the figure to as much as £150bn.

The rate-setters' decision to stick to their self-imposed £125bn limit comes despite concerns over the fragility of recent signs of stabilisation in the economy.

Manufacturing output showed a surprise fall in May, while official figures have shown a far worse than expected 2.4% slump in overall GDP in the first three months of 2009 - the worst in more than 50 years.

In a short statement, the Bank said its current QE operations would take another month to complete, after which it will review the programme again.

The pound immediately gained 1% against the dollar, climbing above 1.62 US dollars on signs the Bank is more optimistic about economic prospects.

According to the Bank's own data, credit conditions remain tight and lending to business fell in April and May - suggesting that the boost to the money supply is having little immediate impact.

Despite the decision to hold back from further QE this month, the CBI business group predicted the programme would eventually be extended.

Chief economic adviser and Sky News Money Panel member Ian McCafferty said: "With the economy and credit conditions still very weak, the Bank's quantitative easing programme has further to run.

"After only five months, it is still too early to determine the effects on the wider economy. So, a further extension through the autumn is needed."

The British Chambers of Commerce had also called for a widening of QE, warning that the risks to small businesses across the economy were "very acute" despite the worst of the recession being over.