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Bank holds interest rates at 5%

The Guardian , 07 December 2006

The Bank of England today kept interest rates at 5%, even as house prices continued their seemingly relentless rise.

After rate increases in August and November - pushing borrowing costs to their highest level for five years - another upward move from the Bank's monetary policy committee (MPC) was a non-starter.

But analysts were uncertain as to whether the MPC would raise rates again early next year, possibly in February. That uncertainty extends to the MPC. Minutes from last month's interest rate meeting showed two of the nine committee members disagreeing with an increase.
The deputy governor, Rachel Lomax, who opposed last month's rise, said lower oil prices and a stronger pound had improved the inflation outlook. But Charles Bean and John Gieve highlighted upside risks to the inflation outlook.

While the 2.4% inflation rate in October remained well above the Bank's target of 2%, the governor, Mervyn King, has predicted that inflation will dip back to 2% over the next two years, as oil prices ease, but not before rising further in the coming months. The Bank's latest inflation report indicated little need for another rate rise any time soon.

As is usually the case, the MPC today had to deal with mixed economic data. Although manufacturing activity and consumer spending appear to be slowing, the services sector and the housing market remain buoyant.

In the latest evidence of the strength of the housing sector, the Halifax bank today reported that house prices rose by a further 1.7% in November, after climbing 1.8% in October. November marked the fourth successive month that prices had risen so strongly.

Analysts said the buoyancy of house prices threatened to become of increasing concern to the Bank, even though it has played down the importance of house prices in monetary policy.

"If house prices continue to post sharp rises over the coming months, it will increase pressure for the Bank of England to lift interest rates further in 2007," said Howard Archer of Global Insight.

The Halifax survey followed a report from the Nationwide building society that reported a 1.4% rise in prices last month. Meanwhile, annual house price inflation on the Nationwide measure jumped to 9.6% in November from 8% in October and 3% at the end of 2005.

Martin Ellis, the chief economist at Halifax, said: "The marked slowing in real average earnings growth over the past six months, and a squeeze on households' discretionary income due to the substantial increase in utility bills during the last year, should temper housing demand."

However, analysts have been saying this for months and house prices have consistently defied predictions of a slowdown.

"The strong rise in house prices last month will have taken most by surprise, keeping the possibility of a rate rise early next year a possibility," said Sarah Bloomfield, of the Centre for Economic and Business Research. "Yet with the chancellor's tightening of fiscal policy in yesterday's pre-budget report, the odds are 50-50."

Manufacturers urged the Bank to keep interest rates on hold into the new year, until the full effects of the last two increases, Christmas trading and the forthcoming wage round become clear.

Steve Radley, chief economist of the manufacturers' organisation EEF, said: "The last two increases have bought the Bank some time which it should use to assess the direction of the economy in the new year. In particular, we have yet to see the knock-on effects of a slowdown in the United States."

Story by The Guardian.Read the full article here

 

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