Interest rates: Bank of England rejects call for cut

HOMEOWNERS hoping for a back-to-back cut in borrowing costs were left frustrated today after the Bank of England kept interest rates at 5%.

Members of the Bank's Monetary Policy Committee (MPC) had been under pressure to make a fourth cut in six months following a flurry of poor economic news.

City economists said they expected the next cut to be made next month, with policymakers reluctant to do so today because of fears that oil and food prices will force inflation above 3%.

The Bank faces a delicate balancing act between controlling inflation and maintaining economic growth.

Data earlier this week revealed that activity in the services sector slowed to its lowest level since March 2003 as firms such as banks, hotels and restaurants felt the force of rising costs and a downturn in new orders.

There was also a shock fall in manufacturing output in March, with a 0.5% decline surprising analysts who had forecast manufacturing production to remain unchanged during the month.

Further pressure was piled on the MPC after the property market showed further signs of a downturn.

House price growth turned negative during April for the first time since February 1996, with UK house prices now 0.9% lower than they were in April last year, according to data out last week from Halifax.

One of the MPC's nine members, David Blanchflower, made his feelings known last week after saying "aggressive action" was needed to prevent the UK economy falling into recession.

Philip Shaw, chief economist at Investec Bank, said today's decision showed the MPC remained concerned about inflation. Bank of England governor Mervyn King has to write to Chancellor Alistair Darling if inflation rises above 3%.

Mr Shaw said: "We are not surprised that the MPC has kept rates on hold at 5%.

"While there has been a degree of poor economic news, the committee remains concerned over inflation and believes the relative weakness of sterling will provide the economy with a degree of stimulus.

"We think it is most likely that the MPC will lower rates again next month."

Manufacturing organisation EEF said mounting threats to business and consumer confidence meant that interest rates will almost certainly need to be cut again in June.

Its chief economist Steve Radley said: "The economy has been through a series of shocks since the credit crisis hit last summer and the Bank has been right so far in responding with a measured approach on rates.

"However, despite concerns on inflation, further cuts to interest rates are needed to prevent the economy from drifting towards recession."

Shop price figures yesterday from the British Retail Consortium and Neilsen showed that the cost of food had risen by an inflation-busting 4.7% year-on-year last month.

Crude oil prices have also risen relentlessly this year and nearly reached 124 US dollars a barrel on the commodity markets today. The price has more than doubled over the past 12 months.

The British Retail Consortium (BRC) said the Bank of England's decision to leave interest rates unchanged heaped more pressure on businesses and individuals' personal finances.

BRC director-general Stephen Robertson said: "As last week's election results showed, the strain on personal finances is one of people's key concerns.

"I understand the Bank has the difficult balancing act of keeping inflation under control while sustaining the economy but financial indicators overwhelmingly point to a gloomy outlook."

He added: "There's little sign yet of the rate cuts since December having much effect. With interest rate changes often taking a year to work through, the sooner the Bank cuts again, the sooner and greater the relief for hard-pressed consumers and retailers."