Interest rates on hold for 2006

The Bank of England has today hinted that interest rates will stay on hold at 4.5 per cent for the rest of the year.

Predictions from the Bank's quarterly inflation report have been taken to mean that there is little chance of the cut in base rate that many have been calling for.

The Bank's interest rate setting Monetary Policy Committee (MPC) raises and lowers the underlying cost of borrowing in the UK - affecting millions of mortgage-holders and savers - in an attempt to keep the CPI measure of inflation as close to 2.0 per cent as possible.

For the last two months official data has shown that inflation is below this level - leading some analysts to predict interest rates could come down in the next few months, making mortgages cheaper.

But the Bank's own prediction for inflation shows that it is likely to rise back to the target rate without action by the MPC - implying interest rates will stay frozen for the foreseeable future.

"Inflation is now predicted to remain close to the 2.0 per cent target over the remainder of the forecast horizon (which runs until 2009)," said Jaspreet Sehmi, economist at the cebr think tank.

She added: "The report indicates that the Bank remains uncertain about inflation and is likely to wait for developments through the first half of this year before making any interest rate moves."

But this does not mean interest rates will be on hold forever, with some economists believing the Bank's forecast is too optimistic and that the MPC will be forced to cut interest rates after developments later on in the year.

"If a weaker outlook for 2007 starts to unfold — as cebr forecasts — then interest rates may be adjusted downwards toward the end of this year," Ms Sehmi explained.

Howard Archer, chief UK economist at the Global Insight consultancy, predicted interest rates would fall even sooner.

"While the Bank's central projections . . . are consistent with monetary policy remaining unchanged for some time to come, indications that there is at least a modest easing bias within the MPC is provided by the fact that the risks to the growth forecasts are seen to be a 'little to the downside' while the risks to the inflation outlook are seen as 'broadly balanced'," he said.

"We believe that the Bank's central growth forecast is still on the optimistic side, particularly in the near term. We suspect that further below-trend growth is highly likely over the coming months as consumer spending is relatively muted. This should help to contain underlying inflation along with anticipated continuing wage moderation. Consequently, we expect the Bank of England to trim interest rates by a further 0.25 per cent by May."