Thursday May 8, 05:17 PM
Bank of England leaves interest rate unchanged
By Ben Perry
LONDON (AFP) - The Bank (NASDAQ: TBHS - news) of England on Thursday left its key interest rate unchanged at 5.0 percent, ruling out a back-to-back cut to help stimulate economic growth as inflation remains high amid surging oil prices, analysts said.
The widely-expected decision by the BoE's nine-member monetary policy committee (MPC (A050540.KQ - news) ) came shortly before the European Central Bank held eurozone borrowing costs steady at 4.0 percent.
Sterling rose briefly after The Bank of England (The BoE keeps interest rates at 5%)
decision before retreating on market expectations of a cut next month.
"It seems odds-on that the Bank of England will trim interest rates from 5.00 percent to 4.75 percent in June, thereby maintaining the trend of cutting by 25 basis points every two months," said Global Insight economist Howard Archer.
The MPC gave no reason for its latest policy move, as is the custom when it does not change the interest rate it offers commercial banks. Clues as to the decision were expected in the Bank of England's inflation report on May 14.
"Rumours circulating over the past few days surrounding an imminent reduction in interest rates proved to be false," said Investec (LSE: INVP.L - news) economist Philip Shaw.
"We were not surprised. Admittedly there has been a certain amount of poor news on the economy this week ... However other factors seem to have overridden this, including the committee's aversion to back-to-back cuts, on the grounds that this could boost inflation expectations," he said.
British inflation stood at 2.5 percent in March, unchanged from February but above the Bank of England's 2.0-percent target for a sixth straight month.
At its last meeting in April, the MPC cut rates by 25 basis points as it sought to balance the risks of rising near-term inflation and an economic slowdown resulting from the credit crunch.
The British central bank has acknowledged that near-term inflation will shoot higher because of soaring commodity prices.
The price of crude oil struck a record high of 123.93 dollars on Wednesday.
Britain's economy made a poor start to 2008, with first-quarter growth of just 0.4 percent, the slowest pace since the first quarter of 2005.
Earlier this week, data revealed that British services sector activity slumped in April to the lowest level since March 2003, when the US war on Iraq began.
The BoE's decision Thursday to sit tight rather than cut rates also came despite a report last week showing that British house prices fell 1.3 percent in April from March, and were down on an annual basis for the first time in 12 years.
Halifax, the country's biggest provider of home loans, said the decline was driven by a squeeze on spending and the rapid rise in house prices in the last few years while British rate rises in 2007 had led to higher mortgage costs.
Home owners are also seeing the value of their properties fall as banks become less willing to offer mortgages to higher-risk borrowers amid a squeeze on credit caused by the collapse of the US subprime home loan market.
The Bank of England last week said that British commercial banks had overestimated their exposure to the US subprime home loan sector and the subsequent global squeeze on credit.
The US Federal Reserve last week cut its key lending rate by a quarter-point to 2.00 percent in a fresh bid to fire up the sluggish US economy.
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