Base rates expected to stay at 7%

Subdued consumer credit figures from the Bank of England yesterday took the pressure off the Monetary Policy Committee, which meets today to decide if interest rates need to rise again. Tom Stevenson, Financial Editor, reports that base rates are expected to remain unchanged.

The Bank of England is expected to leave interest rates unchanged at 7 per cent this week after consumer credit data for September emerged subdued but heavily distorted by the funeral of Diana, Princess of Wales. Economic statistics were skewed, analysts said, by the widespread half- day closure implemented by many shops on the day of the funeral.

"Overall the data are a touch softer than expected, but the distortions in September make the numbers next to meaningless. They certainly won't have a major bearing on Thursday's interest rate decision," said Jonathan Loynes, UK economist at HSBC Markets.

The Bank's Monetary Policy Committee meets today to begin its monthly two-day meeting at the end of which it announces any movement in interest rates. Consumer credit figures, showing a rise of pounds 733m compared with the pounds 1bn increase in August, are expected to persuade the committee that inflationary pressures in the economy are under control.

The Bank has been keen to set interest rates at a sufficiently high level to counter the inflationary impact of the building society windfalls paid out in the summer. It had been feared that free share handouts worth more than pounds 30bn would cause an unprecedented spending spree, but much of the windfalls appears to have been saved.

UK retail sales, the main gauge of consumer spending, fell 1.9 per cent in September, the largest fall since April 1991, but the Office for National Statistics said the September annual rise of 3.7 per cent would have been around 5.5 per cent had it not been for special factors, including the Diana effect.

"Economic activity in September was, we think, undermined by the mood of the nation, but this shouldn't be taken as a weakness in the economy going forward," said Mark Miller, UK economist at Morgan Stanley.

Mr Miller expects UK rates to stay unmoved this month but to go up to 7.25 per cent next. Analysts said the strength of the credit card component of the September consumer credit data - an above-average pounds 284m- was a cause of concern.

"The data will keep some background concern over the possibility that there will be a further increase in interest rates - perhaps as early as this week," said Jeremy Hawkins, BankAmerica economist, although he thought it more likely the Bank would hold off until financial markets had stabilised.

The view that interest rates should remain unchanged was given support yesterday by a survey of consumer confidence by Business Strategies. Bridget Rosewell, Business Strategies' chair, said there was no sign of an "explosion" in the consumer economy and evidence the housing market was cooling. That, she said, meant interest rates should be left unchanged.