Interest rates kept on hold, but more rises seen on the horizon

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The Independent Online

Businesses and homeowners were spared a third consecutive rise in interest rates yesterday after the Bank of England decided to keep the cost of borrowing on hold. Analysts said the Bank was unlikely to give more than a month's respite on rate rises, though, and warned that the next rise would come in August - with the possibility of more in the pipeline.

The decision to leave rates unchanged at 4.5 per cent came as little surprise and there was virtually no reaction in the financial markets. The Bank issued no statement with its decision but analysts said the Bank's monetary policy committee had probably wanted to wait to see if the tentative signs of a slowdown in the housing market were confirmed. "The Bank clearly has more work to do," Howard Archer, UK economist at Global Insight, said. "This marks only a pause in the raising of interest rates."

Business groups gave a cautious welcome to the decision, saying that raising rates for three months in a row would have been unnecessarily aggressive. David Frost, the director general of the British Chambers of Commerce said businesses accepted the need for "moderate" rate rises. "We urge the MPC to proceed with caution as the modest upturn in manufacturing is vulnerable and it cannot become the justification for rapid rate rises," he said.

The CBI's chief economic adviser Ian McCafferty said: "Business needs breathing space to allow the impact of the last increases to take effect."

Homeowners will be relieved, as a rate rise would have added £10 a month to an average £65,000 mortgage. There has been growing evidence that the housing market has responded to the four rate rises since November, and to warnings of the risk of a property crash from senior MPC members.

House price growth and mortgage borrowing have both slowed while consumers' confidence has fallen and government statisticians cut their estimate of growth in household spending in the first quarter.

Economists said that, despite the Bank's protestations, the MPC appears to be focused on the housing market, adding that a sharp slowdown would put the brakes on the rate rises and could even prompt cuts in borrowing costs.

Russell Jervis, the head of Haart estate agents, said the housing market was stabilising "of its own accord". "Further rate increases could have a negative impact," he said.

Roger Bootle, the economic adviser to accountants Deloitte said 2005 would be a "crunch year" for the property market. "I think a housing market slowdown will be in full flow by the middle of next year," he said. "Coupled with low inflation and a high exchange rate this is likely to prompt rates to fall back, ending the year around 4.75 per cent."