Page last updated at 14:33 GMT, Thursday, 5 June 2008 15:33 UK

Interest rates kept on hold at 5%

Graph of Bank of England base rates

UK interest rates have been left unchanged at 5% following the latest meeting of the Bank of England's Monetary Policy Committee (MPC).

The decision to hold rates had been widely expected amid concerns about the pace of inflation.

Rising food and fuel prices pushed inflation to 3% in April, well above the government target of 2%.

The MPC has already cut interest rates three times since December in an attempt to help the slowing economy.

However, the economic slowdown and falling house prices had led some to call for another cut in rates to boost spending.

Businesses squeezed

Many economists feel that the MPC needs to wait and see whether higher food and fuel prices lead to higher wages or lower spending in other areas before changing rates.

The necessity to write a letter to the chancellor should not be the overriding consideration for the MPC
David Kern, British Chambers of Commerce

If inflation rises above 3% then Bank of England governor Mervyn King must write to the chancellor to explain why.

At the MPC's last meeting in May, only one of its nine members voted to cut rates.

"The Bank had little option this month other than to leave interest rates on hold," said Ian McCafferty, chief economic adviser to the employers' group, the CBI.

"Oil and commodity prices are still of great concern and businesses are having to raise prices as profit margins get squeezed further."

Slowdown predicted

House prices are falling as the credit crunch makes lenders reluctant to provide mortgages.

The latest figures from the biggest mortgage lender, the Halifax, showed a 2.4% fall in house prices during May.

This week, the Organisation for Economic Co-operation and Development predicted that UK growth would slow to 1.8% this year and to 1.4% in 2009. It said the global credit crisis, the high costs of commodities such as oil and slowing property markets were all hurting the UK economy.

On Wednesday, the Home Builders Federation called for a half-point cut in interest rates to 4.5%, saying a cut was "imperative" to avoid a severe housing market slowdown.

Also on Wednesday, figures from the Chartered Institute for Purchasing and Supply indicated that the UK service sector shrank in May for the first time in five years, as costs rose and confidence in business prospects fell.

Threats to growth

The British Chambers of Commerce (BCC) said that the MPC should be considering the whole economic outlook and not just inflation.

"We understand the critical need for the MPC to maintain credibility, but the MPC cannot disregard the worsening threats to growth," said BCC economic adviser David Kern.

"The necessity to write a letter to the chancellor should not be the overriding consideration for the MPC."

But the British Retail Consortium supported the decision to keep rates unchanged.

"Struggling customers and retailers certainly need a boost but, with rising oil and commodity prices stoking inflation to well above the 2% target, leaving rates unchanged was the wise option," said its director general Stephen Robertson.

Looking to the future, most analysts expect rates to be left unchanged for several more months.

"I do not expect any move in rates either way in the next few months, but the next rate move eventually is likely to be down not up," said Michael Saunders at Citigroup.

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