UK interest rates frozen

British borrowers could be spared another rate hike this year after the Bank of England today held interest rates at 5.75% amid growing unease over the impact of recent financial turmoil.

The Bank said in a surprise statement accompanying its decision – a rare move for a hold vote – that it was “too soon” to judge the effect of recent stock market turbulence on firms and households.

But it added inflation was likely to remain around its 2% target “for the next few months”.

Many economists expecting rates to hit 6% in the autumn now think the Bank’s rate-setters will take a more cautious view in assessing the impact of recent stock market turbulence on the economy – and could even move to cut rates next year.

Howard Archer, chief UK economist at Global Insight, said inflationary pressures would fall back the longer the financial turmoil continued.

He said: “We anticipate that the Bank will sit tight for an extended period. The eventual next move in interest rates is now more likely to be down rather than up, although we do not expect the Bank to move until well into 2008.”

Despite lingering concerns over solid output growth and pricing pressures, the Bank said that there were “tentative signs” of a slowdown in consumer spending after five interest rate rises since August last year.

ING economist James Knightley, who predicts lower UK growth next year, added: “With inflation set to moderate as a result of weaker activity there is likely to be scope for policy easing during the summer of 2008.”

The Bank’s statement – the first accompanying a hold decision since May 1999 - added that it was “monitoring closely” the situation in financial markets.

Global stock markets have been rocked during August by fears over exposure to bonds secured on US sub-prime mortgages given to borrowers with poor credit records amid rising default levels.

This has led to a credit squeeze as more cautious lenders hike borrowing costs and yesterday prompted the Bank to offer billions of pounds extra for interbank lending.

Business welcomed today’s decision to hold rates. Ian McCafferty, the Confederation of British Industry’s chief economic advisor, said: “High street retailers have had a disappointing summer, household budgets are under pressure and the recent markets turmoil is another reason for caution.”

Retailers also cautioned against any further rises, pressing for a cut to ease the squeeze on consumers and boost high street spending.

British Retail Consortium director general Kevin Hawkins said: “With clear evidence that previous rate rises and higher living costs are now squeezing disposable incomes and undermining retail sales, another rise would have piled on pointless pain.”

The British Chambers of Commerce added that the Bank’s Monetary Policy Committee (MPC) “should not rule out” a rate cut.

Economic adviser David Kern said: “Simply keeping rates on hold today is not enough. The MPC must acknowledge that further interest rate increases should now be off the agenda, at least for the time being.”

The MPC’s decision comes on the heels of recent evidence that interest rates were hitting homeowners, as repossessions drove a 32% increase in houses offered for auction in the second quarter of the year, according to the Royal Institution of Chartered Surveyors.

The hikes have also slowed the housing market, with prices increasing by 0.4% during August – just half the pace of the previous month, according to Halifax, Britain’s biggest mortgage lender.

The Council of Mortgage Lenders’ director general Michael Coogan said: “There is now much clearer evidence that the cumulative effect of five rate rises since last August is slowing activity in the housing market.

“The Bank is right to wait and see, and if market conditions produce a further tightening of credit, it will strengthen the case that the next decision should be that rates go down, not up.”