Bank holds steady on rates

The Bank of England today stuck to its "wait and see" policy by leaving interest rates unchanged at 4.5% for the tenth month running.

The decision was widely expected as the Bank's monetary policy committee (MPC) awaits further signals on the future direction of inflation.

In its May inflation report, the Bank hinted that its next move would be up, with inflation forecasted to rise above its 2% target in the short term. The issue for analysts is when the MPC will raise rates - this year or next.

Inflation hit 2% during April after it rose at its fastest rate for nearly five years due to soaring energy bills and higher air fares. The Bank is worried that higher energy prices could lead to bigger wage claims to compensate for larger utility bills.

With retail sales remaining reasonably buoyant, boosted by demand of flat-screen televisions ahead of the World Cup, concerns about weak demand have faded.

In advance of today's decision, the Bank had the chance to digest further data on the UK economy.

The Office for National Statistics (ONS) said manufacturing output fell by 0.2% in April - the weakest reading since last October - after a 0.7% gain in March. That came as a surprise to analysts, who had been expecting a 0.3% rise.

The data seemed to contradict recent business surveys pointing to a rebound in the manufacturing sector. The April manufacturing purchasing managers' index shot up to its highest level in 18 months.

John Butler of HSBC said today's ONS figures provided "a poor start to the second quarter and raises question marks over whether the industrial recovery is actually underway as the business surveys suggest".

In other data that gave the MPC food for thought, house prices rose by just 0.1% in May, the lowest monthly increase since January, according to Britain's biggest mortgage provider.

Halifax said price growth had fallen dramatically, from 1.1% in March and 2% in April, and there were signs the market may be starting to level off. Still, Halifax said year-on-year growth was at its highest level for 14 months.

It has gone up from 8% last month to 9.1% and the average house prices now stood than £16,000 higher than in May last year at £178,997.

The MPC, unusually, was split three ways at its meeting last month. David Walton wanted a rise, Stephen Nickell wanted a cut and the rest voted to keep rates on hold. Mr Nickell has since been replaced by David Blanchflower, who has given no indication of how he will vote.

Responding to the MPC's decision, Mr Archer said: "We still expect the Bank of England to hold off from acting until 2007. We believe there is a strong case for interest rates to remain unchanged for the rest of this year given significant uncertainties about the longer-term growth outlook, continuing wage moderation and still strong competition on the high street."