Bank of England rate-setters are fearful of "false dawns" despite more positive signs for the struggling UK economy, it was revealed today.
The Bank’s Monetary Policy Committee (MPC) voted unanimously to keep interest rates at their 0.5% record low and continue with its £175bn programme to boost the money supply at its meeting two weeks ago.
Although rising house prices and stock markets gave "promising indications", rate-setters are worried over an "uncertain" recovery.
"The lesson from previous financial crises was that they were not resolved quickly, and that there could be false dawns," minutes of the meeting said.
The Bank said returning confidence could spark a ``virtuous upward spiral'' for the UK, but warned that the woes of the banking sector could prove a ``long-lasting'' drag on recovery.
"The banking system still had to complete a process of balance sheet adjustment, including raising new capital, and bank lending remained weak," the minutes said.
Governor Mervyn King has made recent hints about a potential cut in the deposit rate at which banks leave money with the central bank to encourage lending.
But there was no mention of this in the minutes - giving a boost to sterling.
Three members of the MPC - including the Governor - shocked markets in August by calling for an even bigger rise in the Bank’s quantitative easing programme than was eventually agreed.
Today’s minutes showed the trio thought the further increase "could still be justified" although they voted to continue with QE at its current levels in the absence of major news.
Vicky Redwood, of Capital Economics, said: "The minutes note the recent improvements in the economic and financial data, but still leave the door open to further policy loosening."
The Bank is charged with keeping inflation at 2% and has undertaken an unprecedented programme of stimulus measures to ward off a deflationary spiral.
The MPC now believes it is less likely that its preferred inflation benchmark, the Consumer Prices Index, will fall below 1% because of the diminishing chances of lower gas and electricity bills.
MPC member Kate Barker added her own concerns over "false dawns" in a speech to the West Cheshire and North Wales Chamber of Commerce.
Despite more upbeat economic signs, she warned that it was "still unclear that this rate of improvement will be maintained into the autumn".
She said: "Some of the recovery in manufacturing, in the UK and elsewhere, reflects a less rapid pace of destocking, and special support for the automotive industry has supported demand and output in that sector.
"As these positive factors fade, there is a risk that the pace of recovery may falter, and the path of output could be quite uneven over coming quarters."
