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Last Updated: Thursday, 12 January 2006, 12:34 GMT
UK interest rates unchanged again
UK interest rates have been kept on hold at 4.5% at the end of the Bank of England's January meeting, in line with market expectations.

This is the fifth month in a row that the bank's Monetary Policy Committee (MPC) has chosen to keep the cost of borrowing unchanged.

Economists believe the Bank is waiting for more news on Christmas spending before it makes any move.

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

In recent weeks, financial markets had scaled back their hopes for a rate cut after surveys showed that retail sales bounced back in the run up to Christmas.

Upbeat trading statements from major High Street names such as Marks & Spencer, John Lewis, Sainsbury and Boots had also raised expectations that the Bank would take no action this month.

We think the door is still open for a cut in rates over the next two months, perhaps as soon as next month
Philip Shaw, Investec Securities

Official figures released earlier on Thursday also showed that UK factory output enjoyed its biggest rise in seven months in November.

The Office for National Statistics (ONS) said manufacturing output grew by 0.4% in November after a fall of 0.8% in October. However, output was still 1.8% lower than a year earlier.

Waiting game

Though the MPC's decision to leave interest rates unchanged at 4.5% was widely expected by the financial markets, business leaders said they were "disappointed" .

"We understand that the MPC faces major uncertainties," said David Frost, director general of the British Chambers of Commerce (BCC).

"But we reiterate that waiting too long before taking corrective action could be dangerous, and could cause long-term damage."

Sales shoppers in Edinburgh
The Bank needs a clearer picture of how retailers are faring

But the Bank of England is said to be keen to avoid assessing the all-important Christmas trading season too early.

And after high energy prices lifted inflation above its 2.0% target for five months running last year, the MPC is likely to be keeping on eye on whether workers' pay increases have risen to compensate.

"Until the impact of rising energy prices and wage setting behaviour become clearer, the Bank will be reluctant to change its stance," said Ian McCafferty, chief economic adviser at the CBI.

Focus on February

The EEF manufacturers' organisation supported the Bank's decision to keep rates on hold this month, believing that it needs clearer evidence on the state of the domestic economy, particularly consumer spending.

"Should the evidence point to a weak Christmas period for consumer spending, the case for a cut in rates would be significantly stronger," said EEF chief economist Steve Radley.

All eyes will now be on next month's meeting, when MPC members will have the Bank of England's quarterly inflation report to hand.

If inflation is weaker than expected, the committee could vote for a rate cut as early as February.

"We think the door is still open for a cut in rates over the next two months, perhaps as soon as next month," said Philip Shaw at Investec Securities.

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