Bank set to keep interest rates frozen
The Bank of England is set to leave interest rates on hold in January
Monday, 09, Jan 2006 08:42
The Bank of England is set to keep interest rates on hold when they meet this week.
The base rate of borrowing in the UK has been steady at 4.5 per cent since it was moved to this level in August.
However, with weaker spending on the high street, high oil prices, and sluggish house price growth, economists feel that the time could be coming when interest rates are cut again.
But this move will probably not occur on Thursday, when the Bank announces what interest rates will be for the remainder of January.
Last month one member of the interest rate setting Monetary Policy Committee (MPC) voted for a 0.25 per cent reduction in interest rates, but his sentiments were not shared by the rest of the nine-member committee - who voted to leave rates on hold.
This month, analysts predict Stephen Nickell will be joined in voting for a cut in interest rates by other MPC members, but that the majority will wait at least until the Bank's February inflation report to cut rates.
The MPC raises and lowers the base rate of borrowing in the UK - affecting millions of mortgages and savings accounts - in an attempt to keep inflation as close as possible to the government's two per cent target.
All 86 economists polled by the Reuters and Bloomberg news agencies predict interest rates will stay on hold this month, although two in three of those polled by Reuters predict an interest rate cut is likely before the end of summer.
Howard Archer, chief UK economist at consultancy firm Global Insight, believes there has not been enough reliable data in the last four weeks to convince the Bank that the time is right to cut interest rates.
"We suspect that developments over the past month have not been decisive enough to drive at least four more members of the [nine-strong] MPC into the rate cut camp in January," he said.
He added: "Given continuing significant uncertainties over the inflation and growth outlook, we expect the MPC to remain on the sidelines in January. Indeed, it is very possible that the situation is still not clear enough for a majority within the MPC in favour of an interest rate cut to be reached in February.
"However, we still believe that a 0.25 per cent interest rate cut will occur in the first quarter of this year, in reaction to continuing lacklustre growth and muted underlying inflationary pressures."
But while economists are predicting interest rates will fall, the British public is more pessimistic.
Despite 16 months without an interest-rate hike, consumers still expect rates to rise, Lloyds TSB said today.
Overall, 61 per cent of Britons think interest rates will rise this year, with just 11 per cent predicting rates to fall.
Trevor Williams, chief economist at Lloyds TSB Financial Markets, said: "December’s data shows that consumers are not expecting the interest rate cuts that are starting to be called for by some within the industry and increasingly expected by the financial markets."
He added that he, too, believed rates are set to rise.
"Calls for a rate cut now are somewhat premature and the next move in base rate is more likely to be a rate hike based on recent evidence from the housing market – but not until the second half of the year."
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