Homeowners and industry cheer hold on interest rates

The Bank of England kept interest rates unchanged yesterday, a month after raising them by a quarter of a percentage point, but economists said more rises were just a matter of time.

House prices and consumer demand still show no sign of slowing despite two quarter-point rises since November.

The decision to keep the base rate at 4 per cent came as a relief to homeowners and industry after last-minute speculation in the markets that the Bank might be forced to respond to red-hot house prices and a business boom.

With every indicator pointing to an economy powering ahead, the chances are rising that borrowing costs will go up by another quarter-point, perhaps as soon as next month, as the Bank tries to keep a lid on inflationary pressures.

"Debate now is really going to centre around whether the Monetary Policy Committee tightens in April or May," said Philip Shaw, the chief economist at Investec. "We favour May but a run of strong consumer data could see the Bank becoming impatient and raising rates next month."

Financial markets reacted swiftly. The pound fell against the dollar and the euro on relief the central bank had not repeated February's rise. Futures markets are pricing in rates a full percentage point higher in a year's time.

The European Central Bank also left interest rates unchanged yesterday, at just 2 per cent. But in Frankfurt it is more likely that the question was whether to cut in response to the euro's strength. US rates are even lower and just a quarter of the British level. Industry groups were delighted with the UK decision even though most have pencilled in more rate rises ahead. But they want the central bank to go slowly for fear of killing the manufacturing recovery or pushing consumer spending down too far.

"Manufacturers will welcome this breathing space, which will allow them to take advantage of an export-led recovery," said Dougie Peedle, deputy chief economist at the Engineering Employers' Federation.

All nine MPC members voted for last month's rate rise and there is a good chance some wanted to raise rates this month even though inflation remains well below its 2 per cent target.

The policymakers had to decide just how the rise in sterling, which has gained almost 3 per cent since the February meeting, should be treated when it comes to setting policy.

Some members feel the strength may be just temporary and should be disregarded for the purposes of setting monetary policy unless people and companies start changing their wage and price-setting behaviour as a result.

But others say that the pound's rise will dampen growth and inflation and so reduce the need for higher rates.

"Further interest rate rises are only likely to drive sterling higher," said Roger Bootle, an economics adviser at Deloitte.

The dollar's dramatic turnaround in the past few days will also have allayed fears of economic recovery being derailed in the eurozone, Britain's biggest export market.