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Last Updated: Thursday, 8 June 2006, 11:47 GMT 12:47 UK
UK interest rates steady at 4.5%
Bank of England
Interest rates are set to be frozen again - but for how much longer?
The Bank of England has decided to peg interest rates at 4.5% for the tenth month in a row.

The decision by the Bank's Monetary Policy Committee (MPC) had been widely expected.

Concerns about rising inflation mean most economists now expect the next move in rates will eventually be up.

The Bank's most recent quarterly inflation report warned that inflation could overshoot its 2% target if base rates remained at 4.5%.

The Bank gave no reasons for its decision, but its deliberations will be revealed in two weeks when the minutes of the MPC meeting will be published.

"The outlook for monetary policy even in the near term is far from certain, and the minutes of the meeting should make very interesting reading", said Howard Archer, economist at Global Insight.

Some economists believe that the recent weakness in the stock market and the fall of the dollar will make the Bank hesitate before raising rates.

"The sharp declines in equity prices, which recently brought the longest bull-run for five decades to an abrupt end, and sterling's marked appreciation will have weighed against a rise in base rates," said Andrew McLaughlin, chief economist at the RBS Group.

Divided economy

Recent surveys have also given mixed signals on the economy, with High Street sales picking up but signs of continuing weakness in the manufacturing sector.

UK manufacturing output fell unexpectedly in April by 0.2%, according to figures from the Office for National Statistics released earlier on Thursday, although recent surveys from industry groups have suggested the sector is picking up.

Bank of England rates chart

The CBI employers' group said it was relieved that the Bank had left rates unchanged.

"The economy is recovering from the doldrums of last autumn, raising some fears of the prospect of a modest acceleration in inflation," said Ian McCafferty, CBI chief economic adviser.

"So far, though, this is unproven, and any upward move in rates would have been premature. Leaving rates unchanged sends out a confidence-enhancing message of stability."

Confidence fragile

The British Retail Consortium announced this week that retail sales rose in May, helped by demand for new televisions ahead of the World Cup, although it warned that fragile consumer confidence would be damaged by any rise in rates.

While the housing market showed signs of picking up at the start of the year, recent surveys from both the Nationwide and Halifax have indicated that the market is cooling again.

The Bank of England itself has been giving mixed signals on the future direction of interest rates. At the last MPC meeting in early May, one member wanted interest rates to rise, while another, Stephen Nickell wanted a cut. The rest voted to keep rates on hold.

Professor Nickell has now ended his time on the MPC and has been replaced by David Blanchflower, economics professor at Dartmouth College in the US.

The markets are pricing in a rate increase of a quarter percentage point by the end of the year.

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