Bank keeps rates on hold despite buoyant house prices and services

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The Independent Online

The Bank of England left interest rates unchanged for the fifth month in a row yesterday, a widely predicted decision that delighted business organisations.

But speculation about the timing of the next move was fuelled by new figures pointing to a boom in the housing market and a strong recovery in the service sector.

The Bank's Monetary Policy Committee decided to leave the base rate at its 38-year low of 4.0 per cent. It issued no statement and the outcome of the vote on the nine-strong committee will not be known for a fortnight. The news caused no ripples in the financial markets where City economists were unanimous in saying nothing had changed to alter the Bank's thinking.

The CBI, the largest employers' group hailed it the "right decision". "The economy still needs time to build on the recent early signs of recovery," said Ian McCafferty, its chief economic adviser. "There is no reason why rates cannot stay at this current level for some time to come."

Ian Fletcher, chief economist at the British Chambers of Commerce, said he was worried the MPC might have taken its decision knowing this month's Budget would contain a package on tax rises. "This could throw a spanner in the works of growth," he said.

However, the Bank moved swiftly to scotch the rumours, saying there had been no need for a briefing on the likely contents of the 17 April Budget as the MPC would have time to assess its impact before its next decision on 9 May.

Analysts are split over the timing of the move in rates, with most saying the MPC will either hike next month or in August – the two key months that coincide with revisions of the Bank's economist forecasts.

Fresh ammunition for a hike was provided by Nationwide building society, which doubled its forecast for house price growth this year to 10 per cent after reporting another strong month of price rises in May. It said the average price rose 0.9 per cent, taking annual inflation to 13.8 per cent.

Meanwhile, confidence among UK services firms surged to a 16-month high, while activity in the sector expanded at its fastest rate for a year.

Further evidence of the strength of the recovery came from figures showing the number of visitors to Britain's 50 largest shopping centres last week rose 5 per cent.

Four out of 25 City economists polled recently said the Bank would hike in May, to deal with a combination of spiraling consumer debt and signs of a strong recovery on both sides of the Atlantic.

But Ross Walker, a UK economist at Royal Bank of Scotland, said: "I don't think we will see a rise in rates until August. With sub-target inflation and the manufacturing sector still looking precarious, I think the MPC have a bit more leeway."

Stephen Radley, chief economist at the Engineering Employers Federation, went further, saying: "Talk of increases in rates is premature as any rise would only serve to stop the tentative recovery dead in its tracks."

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