From Our Special Correspondent

LONDON, Feb 15: The Bank of England on Wednesday decided to hold the interest rate at 5.25pc as the rate of inflation dropped to 2.7pc from 3pc in December on the back of a sharp decline in retail gas and electricity prices.

Briefing the media at the bank on the occasion of the release of quarterly inflation report, the Governor, Mervyn King said he anticipated the rate of inflation to come down to the target level of 2pc in the coming months but refused to ignore concerns that could impact negatively on the rate of inflation in the near, medium and longer terms.

“…the committee (Monetary Policy Committee) will look through the short-run volatility to the outlook in the medium term, and it remains ready to take whatever action might be necessary,” he added.

Continuing in a lighter vein he told media persons:” Your colleagues from the sports pages may, in the space of two weeks, have changed their judgment about the England cricket team from the worst to tour Australia in 80 years to the favourites to win the World Cup, but I am confident that your judgment about the prospects for inflation and monetary policy will be less fickle.”

The bank governor’s reluctance to give a firm assurance on the way the rate of inflation would behave in the medium term has fuelled speculation within the financial sector here that by May this year the bank rate would be pushed further up by one quarter-point to 5.5 per cent.

With the inflation rate anticipated to slow down sharply and the Bank rate remaining stable, the economy which is already growing at a robust rate is expected to accelerate further and expand at a rate higher than its average over the past decade.

Answering a question on the concerns about the rising personal insolvencies, bankruptcies and mortgage losses, the Bank of England governor said the number of insolvencies and the amount involved were not large enough to become a matter of concern yet. Official statistics on inflation released by the government on Thursday said the largest downward effect on the CPI annual rate came from transport costs. Prices of fuels and lubricants fell this year, but rose a year ago. There was an additional large downward effect from air travel, mainly due to changes in the cost of fares to European destinations.

Other large downward contributions came from food and non-alcoholic beverages, with prices falling by more than a year ago across a range of produce, and from communication costs, mainly due to increase last year in some landline charges, compared with little change this year. There were also small downward contributions from mobile phone handsets and charges. As an internationally comparable measure of inflation, the CPI shows that the UK inflation rate is above average for the European Union as a whole. The provisional rate for the EU on December 25 was 2.1pc, compared with the UK rate of 3.0pc for the corresponding period.