Rate cut put on ice

UK interest rates have been left unchanged by the Bank of England at 5 per cent. The decision had been widely predicted but a rate cut next month is still considered a better than even chance as the Bank moves to bolster the economy.

A plethora of negative stories about the health of the economy, and the housing market in particular, are putting pressure on the Bank to act. There are also continuing concerns arising from the credit crunch, which has led to thousands of mortgage deals being withdrawn and home loan rates actually rising, despite the Bank's moves to cut rates by 0.75 per cent since late last year.

"The financial crisis is clearly sharply applying the brakes on the economy," said Peter Spencer, chief economic adviser to the Ernst & Young Item Club, the influential forecasting group. "Its most obvious effect is to be seen in the housing market, where the mortgage famine is rapidly undermining both prices and transactions."

Longer term, many analysts, including Henk Potts, equity strategist at Barclays Stockbrokers, expect that rates will fall.

Mr Potts said: "Despite the upside risk to inflation, we expect the Bank of England to reduce interest rates gradually over the coming quarters, with rates finishing the year at 4.25 per cent."