BoE: Rates 'set to stay on hold'

The Bank of England is this week expected to disappoint British retailers hoping for a further cut in interest rates in the build up to Christmas.

Clothes retailers in particular will be hoping for a cut as reports suggest that the unseasonably warm weather during October decimated winter clothing sales.

But economists predict that the Bank’s Monetary Policy Committee (MPC) will keep rates at 4.5% when it meets on Thursday.

The MPC voted to lower interest rates from 4.75% to 4.5% in August – the first cut in two years – and the signs are that this boosted manufacturing activity and helped stabilise the housing market.

The rebound in manufacturing since the cut came despite the disruption to trade between the US and the UK caused by Hurricane Katrina at the end of the month and two major storms since then.

Although concerns surrounding the overall level of economic growth in the UK remain, economists expect the focus of the meeting to be on the potential risk of higher inflation.

The meeting coincides with th Bank’s Quarterly Inflation Report, which is due to be published on November 16. The MPC will scrutinise the report before making its decision, and it is widely thought that inflation rates will remain above 2% for some time.

Barclays chief economist Simon Rubinsohn said: “The discussion at the meeting is likely to have been heavily influenced by the forthcoming inflation report.

“We expect no change in policy on this occasion, with the committee drawing comfort from signs of a pick-up in activity in the housing market.

“The elevated level of the headline inflation rate will have also encouraged a cautious stance from the Bank.”

HSBC economist John Butler said the risk of higher inflation combined with “better news on the household front” implied interest rates would remain at 4.5%.

But economists were less confident on when the next change in interest rates would be and in what direction.

Philip Shaw, of Investec Securities, said: “Next week’s meeting has a very likely outcome, namely that base rates will be left at 4.5%.

“However, less certain is the outlook for interest rates further ahead, although we will know more about the Bank of England’s thoughts following the release of this month’s inflation report.”