In response to the slowing UK economy , the Bank of England Monetary Policy Committee (MPC) has cut interest rates by a quarter percentage point to 5.25%.
The move was widely expected following recent cuts in America, where the Federal Reserve has reduced interest rates by one and a quarter percentage points to 3%.
However, the Bank of England signalled that further cuts couldn’t be taken for granted because of fears over rising prices and the need to ensure that economic stability and inflation were balanced.
According to Incomes Data Services (IDS), average private sector pay deals in the last three months rose to 4% annually, up from 3.5% in 2007,
In its statement, the Bank said: "Inflation at 2.1% in December was close to the 2% target, but higher energy and food prices are expected to raise inflation, possibly quite sharply, in the coming months."
"The Monetary Policy Committee needs to balance the risk that a sharp slowing in activity pulls inflation below target in the medium-term against the risk that elevated inflation expectations keep inflation above target," it added.
The Bank warned that it maight be necessary to sacrifice some economic growth and consumer demand in order to bring inflation back under control.
It added: "Some slowing of demand growth, by reducing the pressure on capacity, is likely to be necessary to return inflation to target in the medium term."
However, some analysts warned that the Bank may have little choice but to cut rates again this year should economic conditions deteriorate further.
Andrew McLaughlin, chief economist at RBS, said "The slowdown in the UK economy has so far been modest, and, with inflation above target, the MPC appears determined to proceed with caution,"
"Nevertheless, economic headwinds are becoming stronger and a more aggressive policy response may yet be required."
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