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Bank leaves rates on hold

04/10/2007

The Bank of England has left interest rates on hold as predicted, amid ongoing turmoil in the financial markets.

Last month members of the monetary policy committee (MPC) also unanimously voted to keep the UK's benchmark interest rate on hold at 5.75 per cent.

The extent to which the committee agreed today to keep the underlying cost of borrowing unchanged will not be revealed until the minutes of the latest meeting are published on October 17th.

But analysts had anticipated that the MPC would keep rates on hold for the third month in a row, as the committee seeks to balance the necessity to stem inflation with the need to protect the health of the country's economy in the wake of an ongoing credit crunch.

Prior to the turbulence on the financial markets it had been expected that the Bank of England would raise interest rates again before the end of the year.

But many economists are now predicting a rate cut before the year is out, amid concerns that the economy is set for a slow down.

Last month's decision by the US Federal Reserve to cut interest rates by half a point has also added to expectations that the Bank of England could follow suit at some point.

America's central bank took the action due to fears that a slowdown in the country's housing market could damage the world's leading economy. Rising default levels in the US sub-prime mortgage market have prompted a global credit crunch, which some fear could begin to have a wider economic impact.

Bank of England governor Mervyn King was last month criticised for not having acted early enough to stem spiralling inter-bank lending rates, with Newcastle-based lender Northern Rock forced to turn to the central bank for emergency funds due to subsequent liquidity problems.

While some analysts had suggested that the MPC could be prompted to cut rates to avoid further criticism, many rightly predicted that the Bank of England would continue with its 'wait and see' policy today, holding off on a rates change until the economic impact of the credit squeeze becomes more obvious.

"The Bank of England may well feel under pressure to take early action to support economic activity, given the recent criticism that it has faced over its response to the credit crunch and the Northern Rock crisis," said Global Insight chief economist Howard Archer, prior to the decision.

"However, we believe the Bank of England will be impervious to outside pressure and will orientate its actions to keeping consumer price inflation to two per cent on a two-year horizon," he added.