British interest rates set to stay on hold

The Bank of England is expected to keep interest rates on hold this week after hitting borrowers with a shock increase last month.

The respite for homeowners is likely to be only temporary as economists expect another rise, possibly by the second quarter of the year.

Worries over inflation – following a rise in the Consumer Prices Index to 3% in December – prompted the majority of members on the Bank’s Monetary Policy Committee (MPC) to vote in favour of a surprise rate hike to 5.25% last month. It was the third increase since August last year.

While the MPC is likely to want more time to study the impact of the recent rises, it could still spring another surprise this week if its own quarterly study of the economy reveals that it is in danger of missing the Bank’s long-term inflation target of 2%.

Governor Mervyn King will have to write an open letter to Chancellor Gordon Brown in the event that CPI inflation goes above 3%.

The diminishing year-on-year impact of higher utility bills should mean inflation comes under less pressure in the months to come, although wage growth remains a worry for MPC members.

Investec chief economist Philip Shaw said it was likely that the MPC would pause for breath in order to see the response of consumers to the most recent rate rise.

He added: “It is not impossible that the MPC suddenly suffers from an extra touch of inflation jitters and opts for a back-to-back hike. Indeed given events of the past few weeks, we are reluctant to rule anything out.

“Our gut feeling is still that there is probably one more rate increase left in the pipeline. Given the potential upside risks posed by above trend growth, firmer wage settlements, more ”rogue“ inflation numbers and a resumption of housing market strength, we are still pencilling in a rise for the second quarter of the year.”