Bank to make finely balanced decision on interest rates

The Bank of England's monthly decision on interest rates is more finely balanced than at any time in the seven years since it was given independence from the Treasury, economists say. Polls of rate-watchers are evenly divided over whether the Bank's Monetary Policy Committee will leave the base rate alone or raise it. No one expects a cut, and a rise of more than 0.25 percentage points would be regarded as a sensation.

Philip Shaw, an economist at the banking group Investec, said: "We expect a hard-fought MPC meeting this week and it is a tough call."

John Butler, an economist at HSBC, said: "It's a tough one. I think it's the nearest you can get to 50 per cent, but on balance I think they may well wait until May.

"They have got two battles. They need to help the manufacturing sector and export sector by lowering sterling, but on the other side they need to slow down the consumer."

Today's UK manufacturing output figures may help to tilt the balance. If those numbers are robust, the Bank may decide that industry can weather a rate rise. But if they are weak, the Bank's governor, Mervyn King, who also chairs the MPC, may decide to let consumers enjoy low borrowing rates for another month.

Interest rates were last raised in February, when the MPC increased them by 0.25 percentage points to keep inflation under control and to curb house price rises and consumer spending. Even though those two factors have kept surging ahead, the MPC voted at its meeting last month to keep rates at 4 per cent.

While millions of savers would welcome an increase, it would make Britain more attractive to foreign investors and therefore push up the pound's value. At $1.83, it is already making life difficult for exporters to the United States and dollar-related areas such as Asia.

But last week Halifax, Britain's biggest mortgage lender, said house prices rose by 2.2 per cent during March, and Nationwide Building Society said they rose by 1.2 per cent. Averaging those two figures at 1.7 per cent implies an annual increase of more than 20 per cent.

At the same time, the Bank of England reported that homeowners withdrew a record £16.2bn from the value of their properties during the final three months of 2003, while consumers borrowed another £1.7bn in February.

Simon Rubinsohn, the chief economist at the wealth management business Gerrard, said this all made it increasing likely that rates would go up this week, adding "I don't think there is any reason to wait until May."

But Mr Shaw said: "We expect the MPC to leave rates on hold at 4 per cent. Despite much high-profile news on the housing market, the wider demand picture looks less explosive."