City bets on post-election rise after MPC holds rates for now

The Bank of England is widely expected to raise interest rates shortly after the 5 May general election, after leaving them unchanged at 4.75 per cent yesterday.

The Bank of England is widely expected to raise interest rates shortly after the 5 May general election, after leaving them unchanged at 4.75 per cent yesterday.

City analysts were unanimous in predicting yesterday's decision, pointing to growing evidence that consumers are tightening their belts in the wake of five rate increases and a slowdown in the once-booming housing market.

Official figures for manufacturing released shortly before the Bank's rate announcement also cast doubt on the nascent recovery in the sector. Manufacturing output fell for the first time in six months in February.

However, given the strength of the overall economy, many economists believe the Bank will raise rates once more to 5 per cent to ensure inflation does not climb above its 2 per cent target. They are split on the timing, with some predicting the next move on 9 May, just after the election, and others arguing that the Bank will want to wait until the June meeting.

Graeme Leach, at the Institute of Directors, said: "We still think a quarter-point rise will come by June, but the situation is uncertain, and when taken together with the general election campaign, probably nudged the Bank towards leaving interest rates on hold (yesterday)."

Two members of the Bank's Monetary Policy Committee - Paul Tucker and the deputy governor Andrew Large - voted for a rate rise last month and probably did so again yesterday. May could prove to be a pivotal month as it coincides with the Bank's new set of inflation and growth projections. In February, the Bank predicted that inflation would rise above 2 per cent in two years and continue to rise gently thereafter. However, the Committee has sat on its hands in recent months because of concerns over the slowdown in household spending. Yesterday Boots became the latest major retailer to give a bleak outlook.

Manufacturing production dropped 0.5 per cent in February and the previous month's small rise was revised to no change. The National Institute of Economic and Social Research estimated yesterday that economic growth slowed to 0.5 per cent in the first quarter from 0.6 per cent in the three months to February.

Martin Weale, the institute's director, said: "It is our view that interest rates need to be 5 per cent or more in the near future." He argued that the weakness in growth would not persist and that the recent spike in oil prices pointed to the need for higher interest rates.

A number of analysts, however, think the Bank is done with raising rates - they have been unchanged since last August - and believe the next move will be down. The European Central Bank also kept interest rates unchanged yesterday at 2 per cent.