Bank leaves interest rates unchanged

Bank leaves interest rates unchanged

The Bank of England today stuck to its cautious line on interest rates by leaving the cost of borrowing unchanged at 3.75%.

Today's decision by the Bank's monetary policy committee (MPC) had been widely predicted after last month's 8-1 vote to raise rates by a quarter point. In addition, the Bank has not changed rates in December for five years.

Economic thinktank the Ernst & Young Item Club welcomed the decision, saying that another increase would have had a major impact on consumers and homeowners before Christmas.

"The MPC have seen that, in tightening the monetary policy screw too early, they risked choking the life out of a fragile economic recovery," Peter Spencer, chief economic advisor to the ITEM Club, said.

"Given how critical consumer confidence is in the run-up to Christmas for the retail and property market, any further rate rise would, the ITEM Club believe, have been the trigger to push the consumer into serious retrenchment and the economy back into stagnation."

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November's decision to raise rates was the first upward move for almost four years.

However, minutes from that meeting showed that committee members had little appetite for aggressive action, and today's decision upheld the MPC's cautious mood.

The Bank is well aware of the high level of household debt, and fears that too rapid a rise in the cost of borrowing will undermine consumer confidence and damage the economy.

But the City believes that rates will gradually creep up to around 5% by the end of next year, dampening inflationary pressures as growth edges up.

Britain's underlying inflation rate, RPIX - which excludes mortgage interest payments - slipped back to 2.7% in October, but was still above the MPC's 2.5% target.

Underlying inflation is expected to drop further over the coming months, but several MPC members are concerned that strong consumer demand could push inflation above the MPC's target in two years.

Data released this week indicated that the UK economy will end the year strongly, with the service sector showing its best growth for six years and manufacturing also picking up.

Other figures showed that house price inflation was slowing, and that retail sales had got off to a slow start in the run-up to Christmas.

Expectations of higher rates next year stem from evidence that the global economy is picking up momentum, led by a revitalised US.

Growth in the world's largest economy has taken off, with gross domestic product expanding at an annual rate of 8.2% in the third quarter, the best figures for 20 years.

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