UK rates tipped to remain on hold

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Businesses suffered a slowdown in growth for the second successive month in June, according to a report today that supports expectations the Bank of England will leave interest rates unchanged this week.

Economists in the City of London are almost unanimous in forecasting that the Bank will pause for breath after imposing two consecutive monthly increases in May and June.

However revisions to headline growth numbers and some hawkish comments by members of the Bank's Monetary Policy Committee have caused nervous jitters.

The output and confidence of companies both fell last month, according to a survey by the business advisers BDO Stoy Hayward. It said the falls might be a response to the impact on consumer spending from the four rate rises since November.

"With the first signs of a cooling housing market and a lower rate of take-up in consumer debt, the rate decisions of recent months appear to be taking effect," Peter Hemington, at BDO, said. "As a result, the MPC will keep rates on hold this month to assess the impact of recent rate rises and any change in consumer spending as a result of Euro 2004 and June's heatwave."

Forty-five out of 46 economists polled by Reuters agreed, saying the MPC would wait for August's inflation report before moving again. One forecast a rise after the MPC's meeting on Thursday. However some of those forecasting no change were keen to hedge their bets following comments by Rachel Lomax, the deputy governor of the Bank of England. She said the Bank would delay raising rates if there was a risk of inflation running out of control and referred to consumers' "binge" behaviour.

Last week the Office for National Statistics revised up its estimate for growth in the first quarter to 0.7 from 0.6 per cent and made historic revisions to growth going back seven years.

"With rates still well below their neutral level and the economy growing significantly faster than trend, the question is not whether rates are going to rise again but when," Ben Broadbent, an economist at Goldman Sachs, said. "Given the ongoing strength of the data, a convincing case can be made for raising rates again in July."

But most believe that, on balance, the committee is unlikely to raise rates three months in a row for the first since it was set up in 1997 against growing speculation that the housing market is cooling.

The MPC noted "tentative signs" of slower activity in the minutes of their June meeting, net mortgage lending slowed in May and both the Nationwide and Halifax house price indices showed smaller increases last month. Philip Shaw, the chief economist at Investec, said: "Collectively these pieces of evidence do suggest a new mood of caution in the housing market and argue strongly in favour of the MPC avoiding a 'gung ho' approach to interest rates."