Page last updated at 14:15 GMT, Thursday, 6 March 2008

Bank keeps interest rates on hold


The Bank of England's rate-setting Monetary Policy Committee (MPC) has decided to keep interest rates on hold at 5.25%.

The decision was in line with analyst and market expectations.

Analysts have highlighted that the Bank faces the threat of a slowing economy at a time when inflationary pressures are increasing.

In February, the bank cut rates by a quarter of a percentage point from 5.5%, amid signs of a slowdown.

February's interest rate cut was the second lowering of UK rates in three months, with the previous reduction coming in December last year.

While the UK has cut rates, the reductions have been less dramatic than in the US, where the Federal Reserve has lowered rates from 5.25% in September 2007 to the current rate of 3%.

On Thursday, the European Central Bank decided to leave its main interest rate on hold at 4% as it also tries to balance inflation and growth.

Difficult call

The Bank's decision-makers had a mixed bag of data to analyse - indicating both rising prices and slowing growth.

Mervyn King
Analysts are now trying to work out when the Bank will cut next

The price of UK manufacturers' products rose at the fastest pace for more than eight years in February, the Chartered Institute of Purchasing and Supply (CIPS) said this week.

Its output price index for manufacturers hit its highest level since the survey began in 1999.

Latest official growth figures show that the UK economy grew by 0.6% in the last three months of 2007, but the quarter saw a sharp slowdown in consumer spending.

No surprise and wise
Graeme Leach, Institute of Directors

The UK's biggest mortgage lender, Halifax, has also said that house prices are continuing to slow.

Mixed reaction

Many economists predict that interest rates will be cut further in the coming months, with most expecting rates to fall to 5% in May.

"A move in April cannot be ruled out, but it would probably only occur if economic data deteriorate markedly over the coming weeks," said Global Insight's Howard Archer.

Stuart Porteous of RBS added: "We expect one more rate cut this year, most likely in May, unless economic conditions weaken substantially."

The housing market is also slowing

Business representatives, sensitive to the effects of weakening growth, say the Bank should have loosened monetary policy on Thursday.

"The decision is not surprising, but we believe the decision is mistaken, given the worsening international and domestic situation," said David Kern, economic adviser to the British Chambers of Commerce.

"We do not disregard the inflationary risks arising from surging food and energy prices, but countering the immediate acute threats to growth must be given a greater priority," he added, calling on the MPC to cut rates as early as April.

However, the EEF manufacturers' organisation welcomed the decision to wait and see. "With manufacturing and the rest of the economy continuing to expand and inflationary pressures growing, the Bank was right to hold rates today," EEF chief economist Steve Radley said.

"Unless the evidence shows the economy slowing faster than expected, the Bank should continue to reduce rates gradually."

This view was echoed by the Institute of Directors (IoD). "No surprise and wise," said chief economist Graeme Leach. "The last thing the economy needs is for an overly aggressive easing in policy now, which has to be reversed later in the year."

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