A fall in the cost of travel helped to keep the rate from rising even further as it compensated for the continuing rise of food prices.
Figures released by the Office for National Statistics showed that consumer prices rose by 0.2 per cent and the annual increase in the cost of living as measured by the consumer prices index remained at more than double the Bank of England's 2 per cent target.
The steady reading follows the unexpected strong jump in April. This was due to the increased prices set by travel providers and airlines in the run-up to Easter and the extra holiday for the Royal Wedding.
The figures also showed that "core inflation", which takes out food and energy, fell from 3.7 per cent to 3.3 per cent in May.
With the inflation rate remaining unchanged, pressure will have eased for the Bank of England to raise interest rates from 0.5 per cent. However, the Bank of England has warned that inflation may hit 5 per cent later this year before falling back towards target by 2013.
The central bank is worried that people will put more pressure on employers for pay rises if they expect inflation to remain high. This would then lead to higher prices, which is known as a wage-price spiral.
Consequently, the Bank of England said that there are very few signs that inflation expectations have affected price or wage setting behaviour.
Hetal Mehta, UK economist at Daiwa, said: "While there was no upside surprise on the headline CPI figure, inflation still remains well over the Bank's target and is likely to rise even further in the next couple of months as higher commodity prices feed through. Nevertheless, the current inflationary forces are largely temporary in nature, and a marked fall in January next year is expected once the VAT increase falls out of the calculations.
"As such, we still think the Bank will look through the short-term spike. And the fact that core inflation fell to 3.3 per cent will be reassuring to the Bank, and further diminishes the prospects of a rate increase this year."
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Customers of Barclays Bank, who were mis-sold payment protection insurance (PPI), are to be reimbursed the total value of all premiums along with 8 per cent interest.
PPI customers of Barclays who made a complaint before April 20 are to be fully compensated following a judicial review decision. Barclays agreed to process all of the complaints, including those that were put on hold due to having to wait for the outcome of the High Court judgment.
In a statement, a spokesperson for Barclays Bank said: “We have said before that when we get things wrong, we apologise, and work hard and work fast to put them right as quickly as possible.
"Working in close co-operation with the Financial Services Authority and the Financial Ombudsman Service, and in recognition of the delay customers have experienced whilst awaiting the outcome of the High Court judgment, we can confirm that we are contacting customers whose complaint was put on hold on or before 20 April with an offer to settle their complaint in full as a gesture of goodwill."
This week, letters will be sent out to PPI customers confirming that they will be reimbursed, and then on August 31, customers will receive a further letter with full details of their compensation.
Peter Vicary-Smith, chief executive of Which?, said: “Banks have a lot to do to rebuild their reputation after over a decade of mis-selling PPI and then mishandling complaints about it.
"It’s fantastic to see Barclays stepping up in this way, acknowledging their mistakes and refunding customers what they’re owed, no questions asked. Hopefully this will have a domino effect and other banks will follow suit – the sooner the banking industry can consign the PPI mis-selling scandal to the history books, the better.”
To help banks handle their PPI complaints, the Financial Services Authority (FSA) today agreed to temporary arrangements for Barclays, Lloyds Banking Group and RBS, to ensure that they are able to handle the complaints properly. Arrangements include extending the periods of time banks have to deal with the backlog of on hold PPI complaints and the vast amount of new complaints.
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Following the closure of its recent tax amnesties, HM Revenue & Customs has launched 16 criminal investigations over tax evasion.
Over 50,000 voluntary disclosures by professionals were received by the HMRC as a result of the taxman’s amnesty - the Offshore Disclosure Facility (ODF) and New Disclosure Opportunity (NDO) - gaining the taxman nearly £500m back in unpaid taxes. The Tax Health Plan (THP) also saw the taxman gain a further £10m back following 1,500 disclosures from medical professionals.
The ODF also raised £91m and the NDO £6m through subsequent investigations. On top of the 16 criminal investigations, which have arisen following the crackdown on tax evasion, the HMRC are also looking into 3,000 further leads.
Gary Ashford, head of tax investigations at RSM Tenon, said: "HMRC is sticking to its word to try and deliver a five-fold increase in prosecutions by opening these criminal investigations, and this is a clear indication that they are stepping-up their fight against tax evasion and non compliance."
The next step for the HMRC is a crackdown on people holding overseas bank accounts and an online register of tax evaders will see evaders being named and shamed online.
An HMRC spokesman said: "HMRC has now successfully launched two major campaigns to address significant risk areas for HMRC such as offshore tax evasion. Campaigns are focused on changing customer behaviour and bringing more people into compliance in a simple, straightforward way and keeping them there.
"Several thousand more offshore-related enquiries related to the NDO and the information collected from banks by HMRC on offshore customers have already started.”
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Just hours after Vince Cable’s warning to banks about missing lending targets to SMEs, the UK’s most senior bankers gave their side of the story. As each banker gave evidence to the Treasury Select Committee, deep divisions emerged between the bankers over the reform of the banking industry.
Bob Diamond, the chief executive of Barclays, Stephen Hester, chief executive of Royal Bank of Scotland, the chairman of HSBC, Douglas Flint and António Horta-Osório, the newly appointed chief executive of Lloyds, each addressed the Treasury Select Committee.
Stephen Hester of Royal Bank of Scotland warned that the value of the taxpayer's 84% stake in the bank could be reduced due to the proposals of the Independent Commission on Banking (ICB), which aims to "ring-fence" retail operations.
Mr Hester said: "I think if we went down that route there will be greater costs, and those costs would be divided between shareholders, customers and the economy as a whole”.
He also spoke of the "moral hazard" of ring-fencing high street operations away from a financial institution's riskier investment banking operations, which he said could "create a protected beast that the government will support”.
Douglas Flint, chairman of HSBC, took a more positive approach by presenting proposals of how ring-fencing could be achieved to the Treasury.
However, chief executive of Barclays, Bob Diamond, warned that plans to ring-fence retail banking could make an implicit state guarantee for banks "explicit".
António Horta-Osório, the new boss of Lloyds Banking Group, seemed to be in favour of ring-fencing, saying that the advantages "reduced the complexity" of banks.
The idea for ring-fencing was initially made in the ICB's interim report published in April. The report suggested the UK retail banking businesses of large banks should be put into separate units, making them isolated from the rest of a bank incase of an event where the lender got into trouble.
Following his warning to banks over the level of lending, Mr Cable has since been accused by the Unite union of issuing "empty threats" to put a tougher stance on tax on banks if they did not meet their target to lend £190bn to SMEs.
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The UK’s four biggest banks received a strong warning today from Business Secretary Vince Cable, who said that the Government is willing to take “further action with tax on banks” if they do not improve their rate of lending to SMEs.
Under the Project Merlin agreement, the banks agreed to lend £76 billion to SMEs in 2011.
But it would seem that they are not living up to the agreement, which had initially given hope to struggling SMEs across the UK.
In an attack on the level of lending being offered to small businesses, Mr Cable told MPs on the Business Committee that the rate of lending was a “serious problem”.
Vince Cable said the Government were looking for better results: “The Chancellor and Prime Minister have made it clear that if we don't get results, they have said we should take further action with tax on banks.”
In response to the warning from Mr Cable, the UK’s four biggest banks will later give their side of the story to the Treasury Committee.
Stuart Gulliver of HSBC, Stephen Hester of Royal Bank of Scotland, Bob Diamond of Barclays and Antonio Horta-Osorio of Lloyds will answer questions on the Independent Commission on Banking.
The warning follows recent news that banks had missed their Project Merlin lending target for the first quarter of the year. They agreed to lend £19 billion to SMEs during each quarter of the year but the banks lent only £16.8 billion.
Mr Cable said there was a mixture of factors involved as to why banks were not meeting their targets. The level of demand from SMEs is one factor, with the banks saying it is weak. However, businesses say they are being discouraged from applying in the first place.
He also said that banks were being more cautious in their lending because of the Government's requirement that banks hold more capital.
Mr Cable said that banks have moved away from "relationship banking" as they “don’t have the infrastructure in place to assess the risk of lending to small business”.
Demand for funding would increase if SMEs felt more encouraged to apply for funding. The Project Merlin deal put hope in many SMEs across the UK but this was soured with news that banks failed to meet their lending targets. Now the Government have recognised it is a “serious problem”, banks will hopefully work harder meaning more funding will become available.
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