Bank of England mulls rate move

Higher interest rates seem to be hitting consumers in the pocket

The latest decision on UK interest rates will be unveiled by the Bank of England later on Thursday, with rising pressure on the Bank for a rate cut.

Business leaders and pressure groups have complained that the current rate of 4.75% is deterring consumers from spending and companies from investing.

The Bank has raised rates five times since November 2003 as record oil prices boosted inflation.

Price growth is still a problem and may delay a rate cut, analysts said.

Waiting game

In May, the UK rate of inflation was 1.9%, just below the Bank's 2% target.

The pound is showing signs of weakness, however, and worries that it may dip further if rates are cut could deter the Bank from lowering borrowing costs just yet.

The Bank has "good reason to wait to see how events on the foreign exchanges unfold before taking action on interest rates," said Stephen Lewis, chief economist at Monument Securities.

"If the pound's weakness develops further, it will possibly exacerbate an upturn in import prices."

Even though the majority of analysts do not expect the Bank's rate-setting monetary policy committee (MPC) to cut interest rates, the chances of a rate cut have increased, they say.

About one in three market observers are predicting a cut, the highest number for some time.

"The consensus is that the MPC will not cut rates this month," said Michael Saunders of Citigroup. But, he added, "what is to be gained by delaying the necessary stimulus? There are advantages in moving rates promptly."

Sputtering motor

What has got a number of observers worried is the increasing evidence that the UK economy is losing momentum.

A manufacturing report on Wednesday showed that manufacturing output in May was unchanged from the previous month, and down 1.9% on a three-month basis.

Retailers are having just as many problems with firms such as Asda, Somerfield and JJB Sports all complaining of difficult market conditions.

The CBI employers' group became the latest body on Wednesday to call for a rate cut.

CBI boss Sir Digby Jones said rates were too high and a cut would be a "prudent and timely response".