Thursday August 7, 01:03 PM
Bank of England holds interest rates at five percent
By Roland Jackson
 |
LONDON, Aug 7, 2008 (AFP) - The Bank (TBHS - news) of England decided to hang fire on Thursday, holding its main interest rate at five percent for the fourth month as it weighs the conflicting forces of slowing economic growth and high inflation.
The widely-expected decision comes as the BoE, in line with major Western central banks, faces a dilemma between cutting short-term rates to boost growth, or lifting them to keep inflation in check.
The European Central Bank left its key lending rate at 4.25 percent on Thursday as it battled with the twin threats of inflation and recession in the 15-nation eurozone.
The US Federal Reserve left American interest rates at 2.0 percent on Tuesday, as the world's biggest economy continued to weaken.
"We believe the Bank of England really had little option to keep interest rates at 5.00," said Global Insight economist Howard Archer.
"The ever growing likelihood of recession calls for lower interest rates, yet this is precluded by elevated inflation levels and risks."
Market participants will focus next Wednesday on a quarterly report from the BoE that will outline its forecasts for economic growth and inflation.
"All eyes will now be on next week's Inflation Report for clues about the near-term policy path," said Lehman Brothers (NYSE: LEH - news) analyst Michael Hume.
"We expect a set of forecasts consistent with rates remaining on hold for the time being reflecting a very concerning near-term inflation outlook and the risk that this may lead to second-round effects on wages and prices."
The central bank gave no reasoning behind its latest decision as is customary when no change is made to the "repo" rate -- at which the BoE lends cash to commercial banks.
Instead, economists must wait until August 20 for publication of minutes from the latest two-day meeting of the Bank of England's nine-member monetary policy committee.
Prior to Thursday's decision, some analysts had forecast a surprise increase in borrowing costs owing to surging inflation.
"The monetary policy committee avoided the temptation to tighten policy at this month's meeting," said Investec (LSE: INVP.L - news) economist Philip Shaw.
"One question we are mulling is the closeness of the vote and whether there is still a significant danger of the committee raising rates, especially as our forecasts show inflation at 5.0 percent in September."
Britain's inflation rate spiked to 3.8 percent in June, almost twice the BoE's official inflation target of 2.0 percent.
Analysts warn that inflation will race even higher in the coming months because of recent steep price increases from domestic gas and electricity suppliers.
The BoE last altered its key interest rate in April when borrowing costs were cut from 5.25 percent as the BoE worried about slowing economic growth. Since then British gross domestic product data has worsened.
The GDP grew by only 0.2 percent in the April to June period compared with the first three months of 2008.
That was the slowest pace of economic growth for more than three years and brought Britain closer to the threat of recession -- which is defined as two or more successive quarters of negative growth.
Ahead of Thursday's BoE rate call, a key survey pointed to fresh weakness in the flagging property market.
House prices fell by 1.7 percent in July from the June level, dropping for the fourth month running amid the global credit crunch, major home loan provider Halifax said.
|
|
|
Send Article by Email
Send Article by IM
Blog This with Y! 360
Printable View
