British interest rates expected to stay put

Rate setters at the Bank of England will meet today to begin their two-day talks on the cost of borrowing in the UK amid expectations for a no-change vote.

Experts have said a decision to hold rates at 5% for the second month in a row is now a “dead cert” as inflationary pressures caused by the rising cost of food and fuel means the Bank has no room to cut rates.

But the Bank’s nine-strong Monetary Policy Committee (MPC) will also have to consider the mounting signs of economic weakness, with recent data suggesting that the downturn is gathering pace.

Figures have shown that consumer confidence dived to its lowest level for nearly 18 years last month on fears of a looming recession, while Nationwide revealed a 2.5% monthly drop in house prices.

The number of mortgages approved for people buying a home also fell to a new low for the second successive month in April, according to the Bank’s own research and just yesterday, data on the UK construction industry made for poor reading as housebuilding woes hit the sector hard.

It seemed certain only weeks ago that rates would come down to 4.75% on Thursday.

However, it is now in doubt if there will be another cut this year after the Bank warned last month that Consumer Prices Index (CPI) inflation could spike as high as 3.7% this year.

The US Federal Reserve also warned yesterday that there may be no more cuts to America’s interest rates, with concerns over inflation looming large on both sides of the Atlantic.

Oil at around $130 a barrel is crippling many businesses and leaving consumers with ever increasing petrol and energy bills.

The MPC is charged with keeping inflation at around 2%, but the measure hit 3% in April and is likely to remain above 3% until well into next year - potentially prompting a series of open letters from Governor Mervyn King to the Chancellor explaining the rise.

A report presented by Mr King last month gave a clear impression that the Bank was unable to ride to the rescue of borrowers with a string of rate cuts.

He added that the economy was “travelling along a bumpy road” and called for patience until inflation returned to target.

Andrew Smith, KPMG chief economist, said a rate cut was now “unthinkable”.

He said: “It’s difficult to envisage anything other than no change. After last month’s Inflation Report warning, a rate cut is pretty unthinkable as the CPI heads towards 4%.

“Rates are on hold until it is clearer which is the greater threat to achieving the inflation target: the risk that rising food and energy costs become embedded through knock-on effects on other prices and wages; or the risk that weakening growth pulls inflation significantly below target once food and energy price inflation slows,” he added.