A gift for borrowers

The Bank of England spared consumers the pain of a pre-Christmas interest rate rise yesterday but it is likely to turn the monetary screw again early next year to keep the lid on inflation, economists said.

With the pound riding high and financial institutions beginning to shut up shop as part of the millennium preparations, the decision to leave the cost of borrowing on hold at 5.5% was widely expected.

But, with consumer demand showing few signs of slowing, City analysts said it could only be a matter of time before the monetary policy committee acted again to restrain demand and keep the pace of price increases in check.

Michael Saunders, UK economist at Salomon Smith Barney Citibank, said: "Inflation will stay low near-term, partly due to the high pound, but if growth remains as strong as we expect, then we are likely to see continued declines in unemployment, plus a modest pick-up in wage growth and some deterioration in lead inflation guides such as producer prices and survey readings of capacity use.

"In these circumstances, the MPC will worry about the medium-term inflation path, and hike accordingly."

Philip Shaw at Investec Bank said the MPC might have been fearful of unsettling markets already nervous about the possibility of another US rate rise on December 21, in the pre-Y2K period. "If the millennium effect does account for some of the MPC's caution, the chances of rates rising next month appear very high indeed."

The MPC offered no explanation for its decision. The minutes of the meeting will be released on December 22.

The "no change" decision came as a relief to homeowners worried about mortgage rates, which have risen twice since September following base rate increases.

It was also warmly welcomed by industry, parts of which are still struggling due to the strong pound.

"The Bank has taken the only sensible course of action for UK business," said Ian Peters, deputy director general of the British Chambers of Commerce. "A further interest rate rise at this stage would have been overkill. The strength of the pound and fierce competitive pressures in the economy are keeping inflation at bay."

His sentiments were echoed by John Monks, general secretary of the TUC: "This brings some welcome pre-Christmas cheer for manufacturing and exports. But it would have been even better for industry and jobs if the bank's millennium year resolution was a promise not to raise rates for the foreseeable future."

Jeremy Hawkins, economist at Bank America, said the pre-emptive action taken by the MPC against an outbreak of inflation should ensure that the peak in borrowing costs is not too far away.

However, there would probably be another two or three quarter-point increases.