The Bank of England has kept interest rates at 0.1 per cent amid predictions that the UK's economic slump may not be as bad as first feared.

But it says that recovery will take longer than forecast and warned about rising unemployment figures.

Governor Andrew Bailey said consumer spending was showing signs of improving with food spending and energy bills above pre-coronavirus levels.

He said: "We have had a strong recovery in the last few months. The pace puts the economy ahead of where we thought it would be in May.

"We don't think the recent past is necessarily a good guide to the immediate future."

Latest forecasts suggest the UK economy will shrink by 9.5 per cent by the end of the year - down from an initial estimate of 14 per cent but still the biggest annual decline for 100 years.

Growth for next year is predicted to be nine per cent, followed by 3.5 per cent the following year - compared with 15 per cent and three per cent forecast in May.

The Bank believes the economy will return to pre-pandemic levels by the end of 2021.

Unemployment is expected to rise from 3.9 per cent to 7.5 per cent by the end of the year with average earnings expected to shrink for the first time since the financial crisis.

The Bank's Monetary Policy Committee said a rise in interest rates would not be considered until there was "clear evidence" of any recovery.

Mr Bailey said while cutting saving rates remained an option, there was no plan to introduce them.