UK interest rates unchanged for 10th month

The Bank of England pegged interest rates at 4.5% for the 10th month in a row today as economists continued to predict the next change will be upwards.

The London market had widely expected the Monetary Policy Committee (MPC) would keep rates on hold this month but some are predicting a rise could come later this year.

Expectations that rates would not be changed were reinforced by weaker than expected industrial production figures for April, which were released earlier today.

Output in April fell 0.6%, the first drop for six months, raising question marks as to whether the recovery in the sector suggested by recent surveys was really underway.

This combined with a stronger pound, which could further hit manufacturers, eased the threat of an imminent rate rise.

At the same time Britain’s biggest mortgage lender, Halifax, said house prices had edged ahead by just 0.1% during May, possibly as a result of consumers becoming more cautious due to expectations that rates will rise.

Evidence that the mini revival in the housing market is running out of steam provides the bank with further breathing space to continue its wait and see approach.

The British Retail Consortium also warned earlier this week that consumer confidence remained fragile, despite a modest rise in retail sales during May, boosted by demand for large televisions ahead of the World Cup.

Economists still expect the cost of borrowing to be increased to 4.75% in the near future, with some pencilling in a rise as early as August.

The MPC recently warned that it was in danger of overshooting its key 2% inflation target within two years time if interest rates remained at 4.5%.

Inflation hit 2% in April after rising at its fastest rate for nearly two years on the back of soaring energy costs and higher air fares.

Investec chief economist Philip Shaw said: “The bank seems very concerned about inflationary pressures in the near-term and it is also optimistic about the pace of growth in the economy.

“If the economy continues to perform as it is, interest rates will rise at some point.”

But manufacturers’ organisation the EEF urged the bank to continue to ignore premature calls for a rise in interest rates.

It said despite publishing figures earlier this week showing manufacturing indicators at their best level for 10 years, the group thought much of this growth was based on exports, while domestic demand remains more subdued.

Business group the CBI also welcomed the MPC’s decision to keep rates on hold.

Ian McCafferty, CBI chief economic advisor, said: “The economy is recovering from the doldrums of last autumn, raising some fears of the prospect of a modest acceleration in inflation.

“So far, though, this is unproven, and any upward move in rates would have been premature. Leaving rates unchanged sends out a confidence-enhancing message of stability.”

The Bank of England last increased interest rates in August 2004, reducing them to their current level of 4.5% in August last year.