UK rate cut hopes fade

The Bank of England is widely expected to leave interest rates untouched later on Thursday.

The CBI has led calls for a further cut, citing continuing weakness in business confidence across the country.

Data released this week showing renewed strength in the services sector, coupled with further signs of house price growth, means rates are expected to remain at 3.5%.

Most analysts are saying the next move on interest rates is likely to be up, possibly in the spring.

At the bottom?

That would follow nine cuts since the start of 2001, taking the cost of borrowing to its lowest level in 48 years.

Henk Potts, analyst at Barclays Private Clients, said: "It's likely we have reached the bottom in terms of rates.

"We think they will stay at 3.5% for the rest of this year and rise to 4.75% by the end of 2004."

In the service sector, activity levels for July grew at their sharpest level in more than year while optimism was its strongest for 14 months.

Shop prices fall

A further reason for the Bank to keep rates on hold was provided by continued strength in the housing market after the Halifax said the cost of property rose by 1.3% in July and by 19.2% on a year earlier.

Consumer spending is not generating inflation Bill Moyes, BRC

And there is still very little sign of inflation picking up in the economy.

The British Retail Consortium (BRC) announced on Thursday that UK High Street prices fell 1.1% in July from the previous month, although they were up 0.5% on a year ago.

The BRC's director general Bill Moyes said that over the year shop prices have risen well below the general inflation rate.

"The Monetary Policy Committee can relax. Consumer spending is not generating inflation," he said.

In June the underlying rate of inflation, which excludes mortgage interest payments, fell to 2.8% from 2.9% in May.

This is above the MPC's target rate of 2.5%, although the rate is allowed to over or undershoot the target by one percentage point.