Britain keeps interest rate at 4%

BRITISH interest rates were left unchanged at 4% yesterday as the Bank of England put sterling’s strength ahead of concerns over a runaway housing market.

But most observers remained convinced that rates would rise next month. Financial markets reacted to yesterday’s meeting of the bank's Monetary Policy Committee (MPC) by selling sterling, which had been near its highest level against the euro in over a year. Sterling slipped by half a cent against the dollar and was also weaker against the euro at 66.14p.

The market for forward interest rates, which allow borrowers to fix an interest rate months in advance of drawing down loans, reflected a general view that the bank would raise rates by 0.5% before the end of June and a full 1% by the end of the year. The bank will not release minutes of yesterday’s meeting until April 21, but analysts said the decision was likely to have been close, with a number of MPC members arguing in favour of a rate rise. This would have marked a change from the committee’s March meeting, when all members voted in favour of keeping rates on hold.

“It’s very difficult at this stage to say much about the balance of power between the doves and the hawks on the committee,” said Alan Castle, an economist with London investment bank Lehman Brothers. “We suspect a number of members would have voted for a rate hike.”

The bank faced the twin problems of a recent rise in sterling, which put pressure on exporters, and continuing runaway house price inflation. House prices in Britain have been growing at over 20% year-on-year and observers have expressed concern at the rising level of personal debt and a possible house price crash.

IIB Bank economist Austin Hughes said the bank’s decision was a signal that future rate rises would be orderly rather than speedy. Mr Hughes expected sterling to remain strong on the short term but agreed that a rate rise was “likely” next month.

British interest rates have risen by 0.5% over the last six months, following 0.25% increases in November and February.

The bank’s decision to keep rates on hold mirrored last week’s European Central Bank meeting, but economists think the eurozone is more likely to see interest rates going down in the short term, as signs of an economic recovery remain unconvincing.