Interest rates were left steady on both sides of the Channel yesterday as the Bank of England and the European Central Bank resisted pressure for an increase in response to the rebound in growth.
The Bank decided to keep the base rate at 3.75 per cent while the ECB's governing council opted to leave rates at their all-time low of 2.0 per cent. The decision had been unanimously forecast by the financial markets, which shifted their focus to when the first move would come next year.
Business groups in the UK welcomed the decision as a breathing space to allow the economy to gain momentum following November's rate rise. "The Bank is right to adopt a 'wait and see' approach," said Ian McCafferty, the CBI's chief economist. "We need both Christmas shopping and New Year sales evidence to tell how customers are reacting to last month's increase."
Economists in the City, where markets are forecasting rates at 5 per cent by the end of 2004, said the only question was when the first rise would come. Stephen Lewis, the chief economist at Monument Securities, said the monetary policy committee was guilty of "dereliction of duty" by not raising rates yesterday. "There are some clear signs that if 4 per cent was the right rate last winter then 3.75 per cent this winter is too low," he said. "If it were raised to 4 per cent, it would only match the rate that ruled between November and February in the build-up to the Iraq war."
But Andrew Smith at the accountants KPMG said November's rate increase had hit consumer confidence. "The MPC should not consider changing rates again until it has a clearer picture in February or March," he said. Others said the picture was confused by the announcement next week of a new inflation measure and target for the Bank.
Gordon Brown, the Chancellor, is expected to move to the HICP measure, running at 1.4 per cent, and set a 2 per cent target. This contrasts with RPIX where the target is 2.5 per cent by the current rate 2.7 per cent. Ross Walker at Royal Bank of Scotland, said: "A move to a 2 per cent HICP target would make it difficult for the Bank to raise rates."
Meanwhile Jean-Claude Trichet, the ECB's president, refused to be drawn on the implications on monetary policy of this year's 15 per cent surge in the euro's exchange rate with the dollar. It hit a record high of $1.2160 against the US currency for the fifth successive day.Reuse content