Bank of England holds interest rates

Published on Thursday 4 September 2008 13:39

THERE was no sign of relief for hard-pressed homeowners and borrowers today after the Bank of England kept interest rates on hold for the fifth month in a row.

The Bank's battle against soaring inflation saw it vote to leave rates at 5%, despite worsening prospects for the UK economy.

Growth stalled between April and June and the Organisation for Economic Co-operation and Development (OECD) said this week the UK would be the only major economy to fall into recession this year.

But the widely-expected decision by the Monetary Policy Committee (MPC) comes with inflation more than double its 2% target at 4.4% – and set to hit 5% in the coming months after the latest round of price hikes by the UK's "big six" energy firms.

The furore over Chancellor Alistair Darling's gloomy comments on the UK's prospects has helped send the pound plunging against the dollar and the euro, adding to inflation pressure.

Most experts predict rates will not fall until November at the earliest when the MPC is satisfied that inflation has peaked.

The CBI business organisation's chief economic adviser Ian McCafferty said: "As the autumn unfolds, the chances of a rate cut will increase, as the slowdown improves the inflation outlook for next year."

But the growing risks to the economy have sparked increasingly public divisions among the nine-strong committee.

Professor David Blanchflower has called for immediate rate cuts to avoid a recession and labelled his MPC colleagues "misguided" for their focus on inflation.

He was hitting back at a newspaper article by fellow committee member Tim Besley – who has voted to hike rates at the past two meetings.

Mr Besley has warned that letting inflation get out of control would be "damaging and dangerous to the economy" and herald a return to the 1970s.

Steve Radley, chief economist at the EEF manufacturers' organisation, said rate-setters faced a difficult dilemma.

"So long as inflation remains stubbornly high, the Bank will continue to face a tough choice. But mounting evidence of a stagnating economy means the case for further cuts is growing," he said.

The latest round of industry surveys published this week showed the UK's manufacturing, construction and services sectors all continuing to shrink during August, despite a marginal improvement on July's lows.