Bank chief: Interest rate to hold

Interest rates are likely to remain the same into next year, after the Bank of England's chief economist declared that there was "no reason" for any change.

Charlie Bean said inflation was likely to remain at about 2 per cent ­ the Government's target is 2.5 per cent ­ for some time to come. His comments give the strongest possible signal that interest rates will be pegged at 4 per cent next week for the 10th month in a row.

Mr Bean told The Independent: "In terms of pipeline pressures on inflation, they are really subdued, so there's no obvious reason why we should feel the current level of interest rates is inappropriate. Inflation is fairly close to target. It is likely to be bubbling around the 2 per cent level for the next year or so, barring an unforeseen movement in, say, oil."

He added that the economy could yet suffer very sudden and marked moves. "We are ready to respond to signs of weakness by reducing rates further," he said.

Mr Bean's comments came as Digby Jones, director general of the Confederation of British Industry, warned that a fresh surge in oil prices could put some companies out of business. "If a business has to pay more for its oil supply it can only pass it on in two places ­ it will be absorbed or it will be passed on," he told the Today programme on BBC Radio 4. "There's not much hope of it being passed on at the moment because we have had 'profitless prosperity' for some time. This will be one more straw on the camel's back."

Oil prices have risen 36 per cent this year amid mounting fears that war against Iraq could cause an oil crisis. There was some relief yesterday in New York, where the price fell slightly on reports that Opec will sanction an increase in production this month.

Mr Bean was speaking during a two-day trip to the North-east of England, where he held talks with business leaders in preparation for next week's meeting of the Monetary Policy Committee. City analysts believe the MPC will keep rates at a 38-year low amid signs the world recovery has stalled, and Mr Bean's comments will do little to shift that view.

He said the Bank's central forecast was for economic recovery at home and abroad to be a "more muted pick-up than we thought a few months ago". But he added: "Good news is as likely as bad news. It is very much a balanced situation. If the news suggests the economy is tending to recover faster than expected, we might need to raise rates."

He said that in May and June the Bank had been confident a recovery was under way and that the issue was when, rather than if, rates would have to rise. But recent falls in equity prices, on the back of US accounting scandals, have knocked confidence.

There was fresh gloom on the stock markets yesterday as the FTSE 100 fell 175 points, or 4 per cent, to 4,274 ­ its biggest one-day fall since 1 August. It wiped £41bn off the value of shares. British economic news has been mixed, with manufacturing having its worst fall in a quarter of a century and signs that shoppers can no longer maintain their high spending habits.

But the housing market is still healthydespite early signs that prices in London are starting to fall. The British Bankers Association said mortgage lending saw its largest rise for at least five years in July. There are, however, fresh fears that the buy-to-let market is unsustainable. The Council of Mortgage Lenders said its members lent £5.5bn to 58,000 people in the first six months of the year compared with £4.1bn to 42,000 people in the last half of 2001. Michael Coogan, its director general, said: "Borrowers need to continue to take a realistic view of the risks."

Today the Royal Institution of Chartered Surveyors will say the surge in buy-to-let has driven down rent levels. Some investors are starting to sell unprofitable properties, a move that could precede a mass rush to sell.