Bank holds interest rates steady

The Bank of England kept interest rates unchanged at 4.75% today amid signs that the housing market has cooled as a result of steadily rising borrowing costs.

Today's decision by the Bank's monetary policy committee was widely expected. All 50 analysts polled by Reuters last week said the MPC would do nothing this month as the economy already appeared to be slowing down in response to the rise in interest rates that began last November.

Analysts now believe that the current interest rate cycle is at - or at least close - to its peak.

"On balance though, we still expect one more 25 basis point interest rate hike this year [in November] and a final 25 basis point hike around next spring, taking interest rates up to a peak of 5.25%," said Howard Archer of Global Insight.

If that turns out to be the case the top of this interest rate cycle would be much lower than the 6% peak of the last rate cycle, which was reached in February 2000 or the 7.5% reached in June 1998.

After five interest rate rises from the 38-year low of 3.5%, consumer spending and the housing market have finally shown signs of coming off the boil. The Halifax bank reported that prices fell for the first time in two years in August, while the Nationwide building society reported just a tiny increase.

The last Royal Institute of Chartered Surveyors report on the market told a similar story while estate agents have been complaining of slumping sales and builders say activity is easing. The Bank of England's own data on mortgage approvals - loans agreed but not yet made - has also shown a steep drop.

But there have been false dawns before when it seemed that house prices and consumer had slowed, only to pick up again. Moreover, the Bank has to remain on its guard against inflationary pressures as the economy is still growing vigorously, analysts warned.

"Future inflationary risks stem from the fact that the economy is still growing above trend while the output gap may well have now disappeared," said Mr Archer. "We still think that the slowdown in the housing market may yet turn out to be more drawn out and less clear cut than many now expect, with periodic bursts of life in the market particularly likely if people start to become more confident that interest rates are now near to peaking."