Bank of England rejects rate cut – for now

It may have been a close-run thing but the Bank of England's Monetary Policy Committee (MPC) chose to leave UK interest rates on hold at 5.5 per cent last Thursday. In the days before the committee was due to meet, there had been fevered speculation that it would lower the base rate for the second month in a row. Some sections of the business and retail community called for a cut, arguing that the economy and consumer spending were slowing dramatically and action was needed to restore confidence.

On the eve of the decision, high-street retailer Marks & Spencer revealed that its annual sales had slipped. The news was greeted with widespread alarm in the City and led to speculation that the UK was heading towards a recession. Meanwhile, UK housing market surveys from both the Halifax and Nationwide confirmed that prices had fallen during the final three months of 2007.

Despite such data, the MPC decided to keep rates on hold, no doubt because members feared that a cut could fuel inflation and further undermine the economy. Over the next few months, rises in petrol prices and utility bills are expected to add to the cost of living.

Trevor Williams, chief economist at Lloyds TSB corporate markets, said: "Inflation is the key concern of the MPC. They clearly wanted to wait until February's quarterly inflation report for reassurance that the time is right to cut rates again."

It does appear only a matter of time before rates are reduced. Howard Archer, an economist at Global Insight, said he considered it "highly probable that the Bank of England will cut interest rates to 5.25 per cent in February as evidence mounts that the UK economy is faltering".

A 0.25 per cent cut in the base rate would reduce repayments on a £100,000 standard variable-rate repayment mortgage by around £15 a month.

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