Relief in City as rates kept on hold

The City, business and homeowners breathed a collective sigh of relief yesterday as the Bank of England left interest rates on hold.

The Bank's Monetary Policy Committee pegged borrowing costs at 5.25 per cent at its latest meeting, after last month's shock increase. But analysts warned it was likely to be a temporary reprieve and some predicted rates would be lifted as soon as next month.

The vast majority of City economists had predicted the no-change decision, but nerves had been jangling amid fears the MPC would spring another surprise. The MPC chose not to explain its decision, but its thinking will be made clear in next week's quarterly Inflation Report, which sets out its medium-term growth and inflation forecasts.

"This means that the Inflation Report is unlikely to have unearthed any hitherto undiscovered inflationary gremlins," said Philip Shaw, chief economist at Investec. "We still suspect there are enough upside risks to inflation in the MPC's minds to trigger another rate rise at some point."

Graeme Leach, chief economist at the Institute of Directors, said: "The Bank of England has wisely rejected a back-to-back increase in rates."

The MPC is fighting sharply rising inflation, and is concerned that big pay deals in the new year bargaining round will trigger a wage-price spiral. The Centre for Economics and Business Research predicts inflation on the broad RPI measure, already running at a 15-year high of 4.4 per cent, will hit 5 per cent in February.

The rates decision came as Halifax unveiled a 1.3 per cent leap in house prices in January. The year-on-year rate of increase was steady at 9.9 per cent.