UK interest rate 'set to be held'

UK interest rates are expected to be held at 5%, most analysts predict, despite a flurry of downbeat data adding to worries about the economy.

The Bank of England's Monetary Policy Committee (MPC) will make its decision on Thursday after a two-day meeting.

After last month's rate cut, from 5.25%, the MPC had been widely expected to hold off for now.

But this week's negative manufacturing and service sector data has led some to speculate a further cut is more likely.

The pound fell on speculation that Bank might cut rates this month, though most observers still expect that the next reduction will come in June.

'Distinct possibility'

The Bank is generally reluctant to have back-to-back rate cuts, said BNP Paribas analyst Alan Clarke.

"One reason for that is the fear that it will cause the market to extrapolate the move and price in even deeper cuts," he added.

However, Global Insight's chief UK economist, Howard Archer, said that another rate cut in May was a "distinct possibility".

"The recent stream of weaker data suggests that the UK economic downturn is deepening and widening," he added.

And Paul Dales of Capital Economics said that the decision was "looking a closer call than a few days ago".

Homeowners lose out

Office for National Statistics data showed that manufacturing output fell by 0.5% in March, the sharpest rate of decline in six months.

However, it rose by 0.3% in the first three months of 2008 compared with the fourth quarter of 2007.

The wider measure of industrial production also fell 0.5% in March - its fastest rate of decline in more than a year.

The figures follow data earlier this week from the Chartered Institute for Purchasing and Supply which suggested that the UK services sector grew at its slowest rate in nearly five years in April as costs rose.

The MPC's April rate cut was the third since early December, as the global credit crunch continued to unsettle the UK.

The crisis, which makes funding mortgages more expensive for banks, meant that not all lenders passed on the full reduction to borrowers, despite government pleas.

Figures from Moneyfacts suggest that about one in four UK lenders have not reduced their standard variable rate in the past month.

Last month's decision to cut rates by a quarter of a percentage point was not unanimous, with one MPC member calling for a 50-basis-point reduction.

And two policymakers said that rates should be held at 5.25% to try to control inflation, which is under pressure from the weak pound and surging energy costs.

The most recent available data showed that Consumer Prices Index inflation was 2.5% in March, holding steady from February.

However, according to the British Retail Consortium's shop price index, food prices rose by 4.7% last month compared with a year ago.

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