Interest rate increase 'unlikely'

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The Independent Online

Homeowners are set for another reprieve today as rate-setters at the Bank of England are expected to keep the cost of borrowing at its record low.

The Bank of England's Monetary Policy Committee (MPC) had been widely predicted to lift interest rates this month from 0.5% to rein in soaring inflation - but the picture has changed in recent weeks.



Economists believe the latest set of gross domestic product (GDP) figures - which last week showed a tepid 0.5% rise between January and March - has killed off any chance of a May interest rate hike.



However, there were calls today from the National Institute of Economic and Social Research (Niesr) for an interest rate hike as it expects surging oil prices to put further pressure on UK inflation.



In its global economic forecast, Niesr warned the UK economic recovery would continue to be weak and the Government was unlikely to hit its budget deficit targets.



But the organisation also said inflation was likely to hit 5% in the second half of this year as the turmoil in North Africa and the Middle East pushes up inflation and limits global growth.



However, the rate of inflation unexpectedly slowed in April to 4%, which while still double the Government's target, did ease pressure on the MPC to take imminent action.



Philip Shaw, economist at brokers Investec, said this week's meeting had "lost its edge" as the risks of a rate hike had diminished.



Mr Shaw and other city analysts now expect a rate hike in the late summer or even November.



This month also marks the last meeting for MPC member Andrew Sentance, who has been leading calls for a rate rise, voting for a 0.5% increase to 1%.



The MPC will have sight of a preview of the latest quarterly Bank of England forecast, which is due out on May 11 and will offer predictions on GDP and inflation following recent developments.



Allan Monks, economist at JP Morgan, also believes the MPC will remain in wait-and-see mode until at least August.



He said: "The MPC remains understandably cautious about growth, given the drags in place from falling real incomes, fiscal tightening and weakening household confidence. We therefore see a rate increase at this week's meeting as unlikely."



However, he added there was a possibility of a more robust GDP result for the second quarter as the recovery gained traction.



Howard Archer, chief economist at IHS Global Insight, is not pencilling in a rate rise until November.



"This reflects our belief that growth will be muted during much of 2011 and that a soft labour market will prevent higher inflation expectations feeding through to lift wage growth significantly," he said.



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