Bank of England expected to hold interest rates: analysts

ANN/AFP ^ | 2005-02-09

[nickcarraway]

The Bank of England (BoE) will likely keep interest rates steady at 4.75 percent for a sixth successive month at its latest meeting amid concerns over the strength of the British economy, analysts said.

All 31 forecasters polled by AFP's financial news wire, AFX News, said they expected the BoE's nine-member Monetary Policy Committee (MPC) to refrain from cutting the cost of borrowing.

"There is considerable uncertainty about the state of the economy," Global Insight economist Howard Archer said, adding that "interest rates won't go anywhere this week".

The exact state of Britain's faltering housing market and of consumer spending are also unclear, analysts said.

The rate-setting MPC -- which begins its two-day meeting Wednesday -- has raised interest rates by a quarter point on five occasions since November 2003.

However a general economic slowdown alongside subdued inflation data have combined to keep interest rates on hold since last August.

Britain's economy grew by 3.1 percent in 2004, the National Statistics office said -- missing finance minister Gordon Brown's target of 3.25 percent.

Although British economic growth "is in line with (the BoE's) November forecasts, inflation is 0.3 percentage points higher (at 1.6 percent)," HSBC analyst John Butler said.

"It's not far off two percent... and there's still significant underlying pressures because economic growth returned to trend levels," Archer added.

If British economy growth accelerates in the early months of this year "that will probably stoke inflationary pressures", he said.

Despite signs of a poor Christmas for British retailers last year, Archer cautioned against over-interpretation, adding that retail sales only account for 40 percent of total British spending.

The BoE meanwhile "are waiting for a bit more clarity about the housing market and about the tightness of the labour market," Butler said.

"Until they get clarity, they are likely to keep interest rates on hold."

The minutes from the MPC's January 13 meeting showed a unanimous vote to freeze its key rate, with members noting there was "relatively little news" over the month on which to base any decision.

The Bank could raise interest rates by a quarter point as early as May, based on the assumption that growth will be reasonable with resilient consumer spending, Archer added.

The main aim of the BoE, which was given responsibility for setting interest rates in 1997, is to keep annual inflation as close as possible to the government's two-percent target.

British 12-month inflation rose to 1.6 percent in December from 1.5 percent in November, official figures showed.