Slower growth clouds rate outlook

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The Independent Online

The Bank of England is expected to raise interest rates in a busy week for the financial markets that sees four of the world's largest central banks set monetary policy.

Analysts expect the Bank's Monetary Policy Committee to order the third rate rise in seven months on Thursday to dampen inflationary pressures from a solid economic recovery and a renewed surge in house prices.

The decision was seen as a foregone conclusion until figures showed a fall in inflation, weaker economic growth and the continued strength of sterling, jangling nerves in the City.

"This week's MPC meeting is no longer a 'dead cert' as many claimed two weeks ago," Philip Shaw, the chief economist at Investec, said.

GDP growth slowed to 0.6 per cent in the first quarter of the year from 0.9 per cent at the end of 2003 while inflation dropped to just 1.1 per cent in March.

Analysts believe the MPC will stick to its stated strategy of increasing rates gradually as the economy expands.

So far this has meant raising rates every quarter to coincide with its inflation forecasts. The latest forecasts are being prepared now.

The US Federal Reserve is expected to keep rates on hold tomorrow but signal a rise further out, while the European Central Bank is under pressure to cut rates on Thursday. Australia sets rates on Wednesday.