Bank keeps rates on hold as house prices go into reverse

The Bank of England's Monetary Policy Committee held interest rates at 5.75 per cent yesterday, defying calls from groups such as retailers for a base rate cut. There was no accompanying statement explaining the decision, though the Bank will publish minutes of the MPC's meeting later this month.

The widespread City assumption is that the Bank may move to cut rates at the next MPC meeting in Nov-ember, to coincide with the Bank of England's inflation report, or in early 2008. The European Central Bank also voted yesterday to leave its rates unchanged.

The hold was welcomed in many quarters. "Presumably at this stage, the MPC has little to add to September's comment on monitoring credit conditions," said Philip Shaw of Investec.

"We remain concerned over the effects of current financial conditions on the economy. For example, one and two-week Libor spiked up today and interbank markets are still not working normally. We note too that the Bank's own data show that the price of loans to non-financial corporates rose noticeably in August. Our view continues to be that the MPC will bring the Bank rate down by 25 basis points next month and that a further easing will follow in the first quarter of next year."

Graeme Leach, chief economist at the Institute of Directors, said: "The MPC was right to hold its nerve. It is still too soon to judge the wider economic fallout from the financial crisis. There is every reason to believe the UK economy is slowing, but there is far less certainty as to whether the slowdown is sufficient to dispel inflationary risks."

The decision was announced as Halifax Bank said UK house prices had fallen 0.6 per cent last month, though annual growth remains in double digits.

Roger Bootle, economic adviser to Deloitte, said: "While a near-term cut is certainly possible, I doubt that the MPC is in a rush to reduce rates, which may not start to fall until next year."

The ECB president, Jean-Claude Trichet, warned that while risks to eurozone economic growth lay to the downside, the ECB was ready to act to counter inflation, despite leaving interest rates on hold.

The ECB's Governing Council held the key rate at 4 per cent after weeks of financial market turmoil and large-scale injections of liquidity in still malfunctioning European credit markets.

M. Trichet also stressed the significance of a united eurozone position on the "very important question" of the euro's strength against the currencies of Europe's major trading partners.

Economists had expected the European rate to stay on hold due to uncertainty about how growth in the 13-nation eurozone will suffer from the strong euro, as well as credit market turmoil, which has pushed up the market rates commercial banks must pay for funds.

David Brown, chief European economist at US bank Bear Stearns, said: "We think ECB rate policy perceptions are in transition and the pendulum is swinging from tightening to easing, and away from inflation risks to slower growth concerns over the longer term."