BoE rate-setters gather for two-day meeting

Bank of England rate-setters begin their latest two-day meeting today under increasing pressure to stave off a looming recession.

But despite a stagnant economy, interest rates are likely to be held at 5% for the fifth month in a row as inflation concerns linger for the Bank’s Monetary Policy Committee (MPC).

The meeting comes a day after the British government unveiled a raft of measures in an attempt to kickstart the housing market, including a £600m stamp duty cut.

But the nine-strong committee will be focused on the Consumer Prices Index (CPI), which rose to 4.4% in July – more than double the MPC’s 2% target – and is set to peak at 5% or more in the coming months.

Although oil prices have fallen back from recent record highs, the UK’s “big six” energy companies have all added to the pressure in the past month by hiking gas and electricity bills for the second time this year.

Global Insight’s chief UK economist Howard Archer expects rates to be held this time, but then cut later in the year as concerns over the economy deepen.

Most experts are now predicting a technical recession – two successive quarters of economic contraction – in the second half of 2008.

Mr Archer said: “The Bank will want to send out the message that while it recognises the increased danger of recession, it is not prepared to trim interest rates until it is confident that the combination of subdued economic activity and rising unemployment is starting to dilute inflationary pressures.”

Splits have become more public among the bank’s rate-setters in recent weeks as Professor David Blanchflower called for immediate rate cuts and called his committee colleagues “misguided” for their focus on inflation.

He was hitting back at a newspaper article by fellow committee member Tim Besley, who warned that letting inflation get out of control would be “damaging and dangerous to the economy” and herald a return to the 1970s.

But businesses swallowing this medicine are feeling the economic pain. Survey data published this week showed the manufacturing activity shrinking for the fourth consecutive month in August, with construction contracting for the sixth month in a row.

Housebuilding has been even harder hit as the mortgage drought hammers the property market, registering a ninth successive month of retreating activity.

On the high street, the CBI business group added that retailers had a “summer to forget” as its distributive trade survey registered 25-year lows in both July and August.

JP Morgan economist Allan Monks said: “Though the MPC does not appear ready to reduce rates...we expect the minutes will acknowledge that downside risks to growth are rising, reducing the balance of risks to inflation in the medium term.”