Bank holds rates at 4.5% despite signs of weakness on trade and house prices

The Bank of England left interest rates on hold at 4.5% yesterday for the sixth month running. But figures showing a record underlying trade deficit and a fall in house prices boosted the chances of a rate cut in the next few months, said analysts.

The Bank's monetary policy committee (MPC) had been widely expected to leave its key repo rate steady because of concerns that rising energy prices could push up wages and inflation, even though unemployment is rising and economic growth has been generally sluggish over the past 18 months.

The nine-member MPC gave no reason for its decision, but will release its latest inflation report next week. This will be pored over by economists for clues as to whether borrowing costs will soon be cut again to bolster the economy.

"Today's decision to leave interest rates unchanged at 4.5% was expected by the financial markets and we are not surprised," said David Frost, director general of the British Chambers of Commerce. "But we are disappointed that the MPC felt unable to take action to counter the adverse pressures affecting the economy.

"Reports from the retail sector suggest that high-street sales have made their weakest start to the year for more than a decade and manufacturing remains under pressure. More worryingly, the labour market is weakening, with employment falling and unemployment rising."

The MPC was presented with two further weak sets of economic data yesterday. The Office for National Statistics (ONS) reported that the country suffered a goods trade deficit of £6.1bn in December - just short of last August's all-time high since records began in 1697. Excluding oil trade and erratic items such as aircraft, the deficit plunged to a record £6.3bn. The gap with non-European Union countries also hit a £3.2bn record.

Both imports and exports reached record levels in December, the ONS said, but imports grew faster than exports, creating the widening deficit.

John Butler, an HSBC economist, said the data showed that healthy consumer spending in the Christmas period probably boosted imports of goods. But, he added, this was a worry for the Bank of England, which is hoping that strong global demand will boost exports and rebalance the economy away from its reliance on consumption.

Howard Archer, of Global Insight economic forecasters, pointed to good news in the robust exports growth - particularly a 6.5% rise to the eurozone, the destination for half the country's exports.

"This indicates that the recent improvement in eurozone growth is feeding through to have a positive effect on UK exports," he said. This could show further improvement in the months ahead.

Figures for all of 2005 show that the goods trade gap hit a record £65.5bn, equivalent to more than 5% of gross domestic product. Even when the traditional surplus in services is added in, there was a shortfall of almost £48bn, or 4% of GDP.

Meanwhile, the Halifax, Britain's largest mortgage lender, said house prices fell 0.4% in January from December, the first monthly fall since last May and one which contradicts the recent Nationwide report for January, which suggested that prices rose 1.4% over the same period.

The fall left the annual rate of change steady at 5.1%, however. Monthly housing market figures fluctuate, but in general they have pointed to a slight improvement in demand and prices recently after the weakness of early 2005.

Halifax's chief economist, Martin Ellis, said the market remained supported by low unemployment and interest rates. "The continuing high level of house prices in relation to earnings, however, should curb housing demand. Additionally, both council tax and utility bills are expected to rise by well above inflation in 2006," he said.

The Halifax said 320,000 first-time buyers entered the market in 2005 - the lowest number for 25 years.