UK interest rates stay unchanged

UK interest rates have been kept on hold at 4.5% at the end of the Bank of England's December meeting.

This was the fourth month in succession that the bank's Monetary Policy Committee (MPC) chose to keep the cost of borrowing unchanged.

Economists expect the bank to wait for Christmas retail figures before making any fresh move to change rates.

Rates were last cut in August, when they were trimmed from 4.75% to 4.5% to help reignite consumer spending.

"Today's MPC decision to leave interest rates unchanged at 4.5% was widely expected by the financial markets," said David Frost, director general of the British Chambers of Commerce (BCC).

"But British business is disappointed that the MPC felt unable to take decisive action to counter the worsening economic situation."

Wage pressures

In this week's pre-Budget report, Chancellor Gordon Brown cut his 2005 economic growth forecast to 1.75%, down from the previous target of 3% to 3.5%, blaming inflationary pressures caused by the rise in global oil prices.

A rate cut is off the table until the MPC is assured there is no risk of spill-over from higher inflation into wages Tamara Henderson, Action Economics

In its last inflation report, the Bank of England predicted that inflation would remain close to its 2% target over the next two years or so, but this assumed rising oil prices would have no effect on UK wages.

But central to the concerns of the MPC are a possible spike in inflation if staff are able to negotiate better pay deals.

"We think a rate cut is off the table until the MPC is assured there is no risk of spill-over from higher inflation into wages," said Tamara Henderson at Action Economics.

Additional pressure on inflation has come from recent stirrings in the house market.

Annual house prices inflation rose for the fourth month in a row in December, according the mortgage lender Halifax, though rival lender Nationwide said the overall picture was one of "stability rather than acceleration".

Crucial

Meanwhile, mixed signals have emerged from the High Street in the past month.

Earlier this month, the CBI said retail sales in November had fallen at their fastest rate for at least 22 years.

But the British Retail Consortium (BRC) said like-for-like sales were up 0.8% on the year after cold weather attracted clothes shoppers.

Building on retailers' hopes for a good Christmas was a survey from the Nationwide Building Society saying consumer confidence rose by its biggest amount since the index was started in May last year.

As Christmas trading statements trickle through in January, the state of the retail sector will be a crucial pointer for the Bank of England when it next decides where interest rates should go.

"The MPC is keen to assess pay deals after the New Year and consumer spending over the Christmas period. Only then will it be willing to think about further rate cuts," said David Page, economist at Investec.

The latest decision was good news for savers who have suffered low returns in recent years.

"Savers could be in for another boost as any changes in the rate usually coincide with the quarterly inflation report," said the Leeds Building Socieity.

"With the next report to be published in February it is possible, but not certain, that the rate will remain at 4.5% in January."