Bank keeps interest rates at 4% despite booming house prices

The Bank of England kept interest rates on hold yesterday despite fresh evidence that the boom in house prices was intensifying.

Homeowners and businesses breathed a sigh of relief as the Monetary Policy Committee decided to keep base rates unchanged. The rate has now been at a 38-year low of 4 per cent for eight months.

The Bank gave no reasons for its decision and City analysts will have to wait for the published minutes in a fortnight's time. The decision had been widely forecast by analysts who said recent stock market turmoil outweighed concerns about surging house prices.

Halifax bank said the price of the average home jumped 2.3 per cent in June to take the annual rate of inflation to 19.3 per cent.

This rate is the highest since June 1989, close to the peak of the last housing boom that ended in a bust. It echoed a similar survey from Nationwide building society.

The pace of the increase in prices prompted the Council of Mortgage Lenders to take the unprecedented step of calling for a rate hike now to prevent sharper increases later in the year that could trigger a property crash.

After the rate decision was announced, business groups hailed the Bank for giving the corporate economy a "breathing space" to recover.

"We applaud the MPC for taking in the wider picture and not being swayed by the current panic over the housing market," said Stephen Radley, the chief economist at the Engineering Employers' Federation. "This is the only sensible decision when any sustained recovery is proving so elusive and when inflationary pressures are absent."

Any lingering fears of an unexpected rate hike had already faded after the plunge in share prices on Tuesday and Wednesday wiped about £70bn off the value of the London stock market.

"Stock markets are so jittery at present," said Ruth Lea, head of policy at the Institute of Directors, which welcomed the decision.

The stock market recovered some of the lost ground as traders reacted to a last-minute revival on Wall Street on Wednesday night.

With the US markets shut for Independence Day, the FTSE 100 closed up 78 points or 1.8 per cent at 4,471, clawing back part of the near 300 points lost on the previous two days.

The market plunged more than 3 per cent on Wednesday to hit its lowest level since the week before Tony Blair won power in May 1997.

Telecoms were the strongest sector, adding 19 points to the main index, mainly on a 6.2 per cent rise in mobile group Vodafone, which recovered as investors took on board Wednesday's denial by the group of any accounting problems.

"We were always going to get a bit of a bounce after yesterday's drama but it's not had much conviction," said Robert Buckland, a strategist at Schroder Salomon Smith Barney (SSSB).

Economists in the City are divided over the timing of the first hike in rates after repeated warnings by the Bank over the strength of the housing market.

"We should be prepared for another month of no change if the markets remain soft, output prospects weaken further and June inflation edges towards its lower target band," said George Buckley, UK economist at Deutsche Bank.

But Michael Saunders, UK economist at SSSB, said: "My base case is that they will probably hike in August. I don't think equities will have another month like the last one."

Meanwhile the European Central Bank left rates unchanged as a stronger euro and doubts over the pace of economic recovery persuaded it to stay put despite their inflation concerns. The ECB kept its key rate at 3.25 per cent, where it has been frozen since last November.