UK rates stay unchanged at 5 75

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Post by IVA News » Thu Nov 08, 2007 4:15 pm
UK rates stay unchanged at 5.75%

The Bank of England has kept UK interest rates unchanged at 5.75% for the fourth month in a row in a widely expected move.

The Bank's decision is likely to have been influenced by the surging oil price, now close to $100 a barrel, which increases the risk of inflation.

Despite continuing uncertainty in financial markets, inflation has once again taken a front seat, analysts say.

UK rates have been on hold since July, when they rose to 5.75% from 5.5%.

No explanation for the decision to leave rates on hold was released.

But recent comments from one of the Bank's policy makers Kate Barker suggests the Bank is currently more concerned about the risks that higher energy costs will feed into consumer prices and wage demands than the possibility of a weakening economy.

"No change to interest rates was not unexpected as neither the outlook for inflation nor the economy clearly justified a cut," said Ian McCafferty, CBI chief economic adviser.

Economic chinks

In the run-up to the Bank's announcement, some analysts had begun to consider that the Bank's rate-setting Monetary Policy Committee (MPC) could surprise by announcing a rate cut.

They based their view on recent data suggesting that certain parts of the UK economy were struggling.

This week, figures from the British Retail Consortium showed consumer spending in October was its lowest for a year, while recent reports on the housing market have all indicated that house prices have reached a peak.

Fresh fears have also been raised about the health of the banking sector, after the chief executives of Merrill Lynch and Citigroup were both forced to quit within a week.

The banks had confessed to staggering losses as a result of investments linked to bad US home loans.

For these reasons, the British Chamber of Commerce said it "regrets" the Bank did not reduce rates this month, particularly given that the most recent inflation data showed the Consumer Prices Index stood below the government's 2% target

Conflicting concerns

Others agreed that a "wait-and-see" approach was justified given that there have been few signs that the problems at Northern Rock, caused by its inability to finance its business at the height of the global credit crisis, will be echoed at other mainstream UK banks.

Chancellor Alistair Darling this week asserted that the UK economy was strong enough to weather "an unparalleled period of financial uncertainty".

He added that years of big profits at UK banks meant their balance sheets were sufficiently solid to withstand any losses linked to the slump in the US housing market.

"It would have been very unsettling if, in the week oil prices nudged $100, the MPC reduced rates," said Graeme Leach, chief economist at the Institute of Directors.

"The impact of the credit crunch in the UK remains highly uncertain and consequently, the MPC is waiting for more information on the extent of economic slowdown before lighting the stimulus fuse, by reducing rates."

All eyes will now be on the Bank of England's Quarterly Inflation Report released next Wednesday and the minutes from the two-day MPC meeting, which will be scrutinised for clues to the future direction of interest rates.


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