Bank keeps interest rates unchanged

Bank keeps interest rates unchanged

The Bank of England today left interest rates unchanged at 4.75% for the eighth month running, with the move coming amid signs of weakness in consumer spending.

The decision had been widely expected - especially because a rise in interest rates at the start of an election campaign would have put the cat amongst the pigeons. However, many economists believe there will be one more tightening of rates, possibly next month.

Members of the Bank's monetary policy committee elected to leave rates as they were as concern grew among retailers such as Boots and Next about signs of belt-tightening from consumers.

However, Mervyn King, the Bank's governor, pointed out that it was premature to say that a downturn in consumer spending had set in because of the difficulty of interpreting the retail data from Christmas and Easter.

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In other signs of weakness, British manufacturing output fell unexpectedly in February for the first time in six months. The previous month's small gain was revised down to unchanged.

The Office for National Statistics (ONS) today said factory output had dropped by 0.5% in February - its first fall since August - when the expectation had been no change. Manufacturing output in January, originally reported up 0.2%, was flat.

Analysts said the spluttering industrial recovery would have reinforced the MPC's inclination to keep borrowing costs on hold.

"The disappointing renewed fall in manufacturing output in February, following on from a flat performance in January, shows that the sector is still finding it very difficult to regain sustainable upward momentum after faltering markedly in the second half of last year," John Butler, the chief UK economist with HSBC, said.

In the housing market, recent figures from the Nationwide, Britain's largest building society, showed the biggest monthly drop in prices for 10 years during March. Meanwhile, rival lender Halifax yesterday reported that house price inflation had sunk to a three-year low of below 10%.

Despite today's decision, there were widespread expectations that borrowing costs would go up at least one more time.

"We still think an interest rate hike in May is a very real possibility, given the underlying pressures stemming from the lack of an output gap, gradually rising earnings growth amid a tight labour market, and high producer price inflation," Howard Archer, the chief UK economist with the consultancy Global Insight, said.

Last month, two MPC members - Andrew Large, the deputy director, and Paul Tucker, the executive director - voted for a quarter-point rate rise on the grounds that inflationary pressures were building up as a result of the tight labour market and rising factory gate prices.

In February, inflation remained at 1.6% for the third month running - still below the Bank's 2% target - but hawks on the MPC argued in favour of tightening rates to keep it from exceeding that figure.

"Steady as she goes is the right approach. With house prices stable, retail sales cooling and manufacturing still in need of as much help as it can get, an increase would have been a mistake," Ian Brinkley, the TUC chief economist, said.

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