Bank keeps rates on hold despite a further fall in property values

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The Independent Online

The City, industry and hard-pressed homeowners alike will have to wait a little longer for the next reduction in the cost of borrowing. As widely anticipated, the Bank of England's Monetary Policy Committee voted yesterday to keep rates on hold, at 5.25 per cent, despite the latest Halifax data showing another drop in property values.

The decision saw sterling rise above $2 for the first time this year, gaining more than half a cent to trade at $2.0012.

The consensus in the City is that rates will be held again in April and cut at the MPC's meeting in May. By that time, the severity of the slowdown should have become clearer, as will the inflationary pressures feeding through to price rises in the shops.

Opinion is divided as to how far and how fast the bank will be able to follow the "market path" downwards to below 5 per cent. James Knightley, an economist at ING Markets, said:"We suspect that the Bank will cut rates in May, but activity data will need to weaken fairly markedly to get that to happen. There is likely to be more room for manoeuvre in the second half and into 2009 with rates bottoming at 4.25 per cent."

But Howard Archer of Global Insight saw rates going lower. "We expect rates to be down to 4.5 per cent by the end of the year and believe they will fall to 4 per cent in the first half of 2009. We believe extended below-trend growth will gradually, but steadily, dilute underlying inflationary pressures."

In February, the Bank cut rates by a quarter of a percentage point from 5.5 per cent, when the news on the economy was more uniformly poor. Since then, there have been some brighter signs on output, especially in the non-financial part of the services sector, and for exports. There have also been indications that higher world food, energy and commodity prices are pushing inflation and inflationary expectations sharply higher. Oil reached yet another new high yesterday.

The Bank has virtually admitted the consumer price index will "spike" temporarily at 3 per cent again later this year, at which point the Governor will have to write a letter of explanation to the Chancellor, the second in 18 months.

Ian McCafferty, the CBI's chief economic adviser, said: "It is worrying public expectations of inflation are rising and may yet feed through, via wages, into a more ingrained pick-up. Holding rates shows the Bank is determined not to compromise its mandate."

The Halifax index of house price inflation fell this month to 4.2 per cent on the year, its lowest level since October 2005, after a 0.3 per cent fall in the price of an average property during February.

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