Bank leaves interest rates on hold

Bank leaves interest rates on hold

The Bank of England stuck by its "softly softly" approach to the mountain of consumer debt yesterday, keeping interest rates unchanged at 4% despite the renewed surge in the housing market.

Wrongfooting many in the market who had expected an increase this week, the Bank's nine-strong monetary policy committee froze borrowing costs for the second month in a row.

But the reprieve for homeowners is likely to be short-lived, City analysts said. "Further rate rises are a question of when not if," said Ross Walker, of the Royal Bank of Scotland.

Futures markets are now pricing in borrowing costs rising by a full percentage point by the end of the year and a half-point by the end of June, even though inflation remains well below the Bank's 2% target.

Mr Walker said "tactical considerations" were likely to have dominated yesterday's discussion rather than economic fundamentals.

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"A hike this month risked undermining the MPC's stated 'gradualist' approach and, consequently, pushing the pound even higher on the foreign exchange markets," he said.

The decision eased some of the pressure on sterling which fell half a cent against the dollar to $1.83.

With Threadneedle Street the only leading central bank besides the Reserve Bank of Australia to have started increasing rates, investors have piled into sterling, posing a dilemma for the Bank. The more it raises rates to choke off consumer borrowing, the more pain it inflicts on Britain's export sector. Analysts said the strong pound was probably the key factor in prompting policymakers to put off another rate rise.

Industry leaders reacted with relief to yesterday's decision. "Two rises in three months would have poured fuel on the fire of expectations of further rises to come, potentially pushing the pound to damaging levels against the dollar," said Steve Radley, chief economist at EEF, the manufacturers' organisation. "The Bank can afford to wait longer to assess the impact of the last two rate rises on both the consumer and the dollar weakness on the economy overall."

Ian McCafferty, chief economic adviser at the CBI, said: "Business is pleased the Bank has not rushed into a decision to raise interest rates. The manufacturing recovery is fragile, inflation prospects are well under control and the previous two rate rises have not fully fed through."

Some MPC members are clearly itching to increase borrowing costs. Last month, the Bank's deputy governor, Sir Andrew Large, said he was aware of the build-up of consumer debt every time the committee met. But with inflation falling to 1.3% in February, other members have argued that the MPC should concentrate on its core mandate of keeping price pressures below target.

"I wouldn't be surprised if the decision was a close vote," said George Buckley, a Deutsche Bank economist. "It just means they'll put it off until May."

February's surprise fall in industrial output is also likely to have added to the arguments of members favouring no change. GDP growth is likely to be lower than the Bank expected as a result of the 0.6% fall in manufacturing output.

Guardian Unlimited © Guardian Newspapers Limited 2003