09/02/07 - Bank of England Interest Rates Held

Homeowners will be pleased to know that the Bank of England’s Monetary Policy Committee ended days of speculation and kept interest rates on hold at 5.25% at the end of their two-day meeting midday today.

However, economist believe it to have been a close call this month as the quarterly inflation report – traditionally the trigger of bank rate movements – was suspected may show further increasing tendencies. CPI hit 3% in December and if it had increased any further Mervyn King would have had to write a letter to the Chancellor explaining why inflation has risen above 3%.

However 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.

The previous change in Bank Rate was an increase of 0.25 percentage points to 5.25% on 11 January 2007. Most economists are predicting a further rise before summer, so today’s relief at the hold is likely to be temporary.

Business groups welcomed the decision, saying the Bank was right to wait and see the effect of January's rise.

In January, the Bank increased rates from 5.0% to 5.25% in an attempt to curb inflation, which had hit an 11-year high of 3% the month before.

The news should offer relief to mortgage holders, as it will give some much-needed breathing space.

The Bank's decision had been widely expected by analysts, after the Bank acted last month to curb inflation.

'Wait and see'

The Bank of England has increased interest rates on three occasions since last summer, by one quarter of a percentage point each time in August, November and January.

There is a very real risk that interest rates could go higher still

Manufacturers welcomed the news, with the EEF saying the Bank had been right to take a wait-and-see stance.

"The Bank is right to hold its fire until the smoke clears and the impact of the recent rises becomes clearer," said EEF chief economist Steve Radley.

"Another rise so soon after the last risks spreading unnecessary alarm amongst business and the consumer."

More rises?

Global Insight chief economist Howard Archer suggested the Bank's decision could well have been a result of a close vote by the Monetary Policy Committee (MPC) and may prove to be only a "temporary reprieve".

"We currently expect 5.5% to be the peak in interest rates, but there is a very real risk that interest rates could go higher still."

Deloitte economist Roger Bootle added it was "perfectly possible that interest rates will eventually need to rise as far as 6%".

The economy remains strong, with forecasts predicting 3% growth in the first few months of 2007, while inflation has been significantly above Bank targets for a number of months, partly as a result of high fuel costs.

Meanwhile, the housing market is resilient. The latest Halifax data showed property prices rising 1.3% in January, although the group expects prices to dip later this year.