Bank set to freeze rates at 4.75%

THE Bank of England is expected to freeze interest rates at 4.75% this week after business and consumer confidence failed to recover after the general election.

Economists are predicting the bank's Monetary Policy Committee (MPC) will hold rates for the 10th month in a row, but many believe that recent economic data has been so weak that lower borrowing costs could soon be on the cards.

Gloom is greatest in the retail and manufacturing sectors due to falling demand, while a weaker housing market has left many homeowners unwilling to spend.

Research by accountants BDO Stoy Hayward, to be published today, claims business confidence is at its lowest level since October 2003.

At the same time, it found households widely expected the government to hike income tax or national insurance rates in the next few months and were preparing for this by reining in their spending habits.

Capital Economics said recent economic data had increased the chances of a near-term cut in borrowing costs.

Factory output had declined for the first time in more than two years in May, according to the Chartered Institute of Purchasing and Supply (CIPS). It also reported a slowdown in the construction and services sectors.

Evidence that consumers were also losing their appetite for debt has also added to the case for a rate cut, economists said.

The Bank of England released data last week that showed credit card borrowing had slowed to its lowest level for nearly four years during April.

Many households are also having to adjust after their fixed-rate mortgage agreements end this summer after two years and property prices are continuing to fall.

Property website Hometrack reported that house prices eased by 0.1% during the four weeks to May 17 the third consecutive month they had fallen by this amount.

In the opinion of Capital Economics, the cost of borrowing will be unchanged this week but economic data suggests "that an interest rate cut may not be too far away."

However, Royal Bank of Scotland economist Ross Walker said any attempt to "fine tune" monetary policy with minor adjustments in base rates would confuse financial markets.