Interest rates stay on hold

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The Independent Online

Interest rates were pegged at 4.5% for the seventh month in a row today.

The decision by the Bank of England's Monetary Policy Committee (MPC) had been widely expected as inflation is forecast to remain near to its 2% target.

A rate cut looked imminent a few months ago, but analysts warned today that the MPC could extend its wait-and-see approach for the next few months.

That will disappoint retailers faced with lacklustre trading conditions, while households are also struggling under the weight of rising energy bills.

Responding to today's decision, the CBI said the MPC needed to be ready to act if the current sluggishness in the economy continued and inflation showed any signs of dipping below target.

Expectations for a rate cut cooled last month after forecasts from the Bank showed inflation would be near to 2% over the next three years. House prices have also showed signs of gathering pace, while recent data from the services sector revealed the fastest expansion in two years.

Members of the nine-strong MPC will also be wary about the impact of rising energy bills on wage settlements over the coming months.

The next quarterly update from the Bank is due in May and is seen as the next most likely date for the MPC to consider moving rates.

Investec Securities chief economist Philip Shaw said: "Given the Bank's latest inflation projections, today's meeting was an easy one to call.

"The balance of news has turned around significantly over the past month and we now expect rates to remain on hold at 4.5% for the remainder of the year, which would mean the longest period of interest rate stability since the MPC was formed in 1997."

The last three meetings of the MPC have seen Stephen Nickell vote in favour of a cut to 4.25% but his stance has so far failed to attract any support.

The major area for concern in the economy is the retail sector after recent figures from the British Retail Consortium showed flat sales and rising costs so far in 2006, with like-for-like sales up just 0.6% in February following the most subdued January for more than a decade.

CBI chief economic adviser Ian McCafferty said: "The MPC has opted to remain on a steady course to gauge whether the spring will bring signs of a fledgling recovery.

"But, with the current sluggishness of the economy and inflationary data likely to undershoot the Bank's expectations, we believe there will be room for a quarter point cut in interest rates before too long."