UK interest rates 'set to remain on hold'

Interest rates are set to remain on hold tomorrow as the Bank of England reacts to the sharp slowdown in consumer spending, economists predict.

Interest rates are set to remain on hold tomorrow as the Bank of England reacts to the sharp slowdown in consumer spending, economists predict.

A no-change decision will mark the ninth month in a row that the Bank’s Monetary Policy Committee (MPC) have kept rates at 4.75%.

Momentum for a rate rise gathered after inflation jumped from 1.6% to 1.9% in March, but then petered out in the wake of poor manufacturing and retail data.

The Confederation of British Industry published figures which showed that the number of retailers reporting falling sales rose to its highest level in almost 13 years over the past 12 months.

The trading troubles of retailers were underlined by B&Q owner Kingfisher and catalogue group Argos which saw sales come under pressure as shoppers kept a tight control of budgets.

Kingfisher blamed a combination of factors including higher taxes, debt costs, poor spring weather and an early Easter for keeping consumers at home.

Manufacturing output also went into reverse in April for the first time in 23 months, according to research by the Chartered Institute of Purchasing & Supply (CIPS).

Economists said the MPC was likely to sit on its hands as its monthly meeting takes place two days before the Bank of England’s quarterly inflation report.

Investec economist Philip Shaw said the fact that inflation was close to a seven-year high meant the outcome of the meeting was not a foregone conclusion.

But he believed there was only a 25% risk of a rate rise this month because the evidence suggested that the global economy had entered another soft patch.

Steven Andrew, an economist at F&C Asset Management, expected rates to be on hold but warned against becoming too optimistic about cuts in the near term.

He said: “The fundamentals of the UK economy do not look anywhere near bad enough to warrant an interest rate cut – yet.”

The MPC delayed its monthly meeting because of the general election but will not be influenced by the campaign or the subsequent victory by Labour.

It will move on rates if it believes there are substantial risks to inflation missing its target of 2% in two years’ time.

Economists believe inflation will fall back from its level of 1.9% in March when figures are published for April due to the timing of Easter, which came earlier this year and led a number of retailers and airlines to raise prices.

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