Bank of England Holds Rates at 5%


The Bank of England’s monetary policy committee left interest rates unchanged at 5 per cent for the fifth consecutive month on Thursday, after evidence of a weakening economy left it little scope to toughen its stance against rising inflation.

All analysts polled by Reuters before the meeting had predicted rates would stay on hold, and most think they will remain unchanged until the end of the year.

That is despite the probability that data already seen by the MPC will show inflation accelerated past 4 per cent in July, strengthening the arguments for higher rates.

The MPC has already looked closely at the case for a rate rise, according to minutes of last month’s meeting that revealed a three-way split among those wanting to cut, raise or hold.

Several City economists think the economy is already contracting, after a run of unremittingly bleak data showing falling industrial output, a fragile services sector and no signs of recovery in the mortgage market.

The MPC will set out new forecasts for growth and inflation when it publishes its quarterly inflation report next week. These are almost certain to show weaker growth prospects and a bigger near-term spike in inflation than the May forecasts.

But the decision to hold rates may imply the Bank expects the economic slowdown will be sharp enough to rein in demand and calm inflation in the medium term without raising rates.

George Buckley, economist at Deutsche Bank, said that since it took at least a year for a rate change to affect inflation, a rise now would bring down consumer price inflation precisely at the time it was falling anyway due to weaker demand”.

The house price index published by the lender Halifax on Thursday showed prices fell a further 1.7 per cent in July, contributing to a year on year fall of 8.8 per cent that means prices have returned to the level they were at more than two years ago.

The MPC has argued that falling house prices need not make a big difference to consumer spending, but Michael Hume, economist at Lehman Brothers, said there could soon be signs of a bigger knock-on effect that would challenge that view.


TradingEconomics.com, Financial Times
8/7/2008 5:27:05 AM