The Bank of England kept interest rates at their record low today despite rising inflation squeezing households' spending power.

Inflation has soared to 4.5% in recent months - more than double the Bank's 2% target - driven higher by the rising cost of essential items such as food and fuel.

But the Bank's Monetary Policy Committee (MPC) voted to keep rates at 0.5% for the 28th month in a row, even though a hike could help to bring inflation down back towards its target.

Key Points

  • Base rate kept at 0.5% for 28th month in a row
  • Inflation is at 4.5%, more than double the BOE's 2% target
  • While the cost of living also continues to rise

The Bank also held its quantitative easing programme at 200 billion.

MPC members have been concerned about the strength of the economic recovery in recent months and more signs of a slowdown have emerged since its last meeting a month ago.

Recent surveys have revealed that growth in the manufacturing and the services sectors have slowed since the first quarter of 2011.

There has also been increasing evidence of a slowdown in consumer spending after retailers including homeware chain Habitat, department store TJ Hughes and fashion outlet Jane Norman collapsed into administration.

Many economists now do not expect a rates rise until next year.

Living costs rising

But at the same time there are signs that the cost of living continues to rise, which spells trouble for cash-strapped families whose income is failing to keep pace with rising prices.

Scottish Power will raise gas and electricity prices by 19% and 10% respectively next month and other energy suppliers are expected to follow.

The British Retail Consortium said food prices rose 5.7% in June - the highest rate for two-and-a-half years.

Borrowers are seeing the benefits of expectations that it will be some months before rates rise, with the average cost of a two-year fixed-rate mortgage falling recently to an all-time low of 4.31%, following a drop in swap rates, upon which the deals are partially based.

But the delay is unwelcome for savers, who will continue to suffer from low returns on their money at a time when high inflation is eroding the value of deposits.

The bank has warned that inflation will rise above 5% later this year and remain above target throughout 2012, before falling back in 2013.

CBI chief economic adviser Ian McCafferty says: "Mixed messages from recent data leave the MPC in a difficult position.

"But with inflation likely to rise to 5% by the autumn, and the economy still gradually recovering, a shift in policy should not be ruled out before the end of the year."