Bank keeps interest rate unchanged

The Bank of England today held the base interest rate at 4.75% for the fourth consecutive month, with the decision coming amid evidence of a slowdown in house price growth and weak economic data.

It came as little surprise to the City, where observers had predicted that rates would remain unchanged this month - and for some months to come - after a series of disappointing results in the retail and manufacturing sectors.

Earlier this week, the British Retail Consortium said shop sales had fallen for the first time in almost a year, and the Office for National Statistics stuck by its gloomy estimate of 0.4% growth in gross domestic product in the quarter to the end of September.

The Halifax, Britain's biggest mortgage lender, reported that house prices had again fallen last month, and said it expected prices to drop by 2% in 2005. Along with many other lenders and city economists, the building society said the interest rate would fall to around 4.25% by the end of 2005.

And there was further cause for concern today as official data showed UK trade deficit widened to ?5.3bn in October after imports hit their highest level since records began.

These latest figures contrasted sharply with a series of better than expected reports last week, which - in addition to an upbeat report by the Bank's governor, Mervyn King, to the Treasury select committee - appeared to strengthen the prospect of a rate rise.

Nationwide said house prices rose by 1% in November, reversing a fall of 0.4% in October. The CBI also reported a pick up in retail sales growth, and the Paris-based Organisation for Economic Cooperation and Development predicted three increases in borrowing costs next year, taking rates to 5.5%.

However, with inflation still well below the government's target of 2% over two years, the monetary policy committee decided there was no need for an anti-inflationary rise. Apparently satisfied that the current slowdown in the housing market was not in danger of turning into an outright slump, committee members voted against a cut.

"Interest rates look set to remain on hold for some months to come," Simon Rubinsohn, of brokers Gerrard, said.

Howard Archer, the chief UK economist at Global Insight, said that, while it had been a "cast iron certainty" that the bank would leave the base rate unchanged today, there were doubts over the next few rate decisions.

"What happens with interest rates in 2005 is very far from clear, and the betting is wide open," he said. "The shortest odds must be that interest rates will stay unchanged during the early months of the year, while the Bank of England examines further the extent of the housing market slowdown and seeks greater clarity on the state of the economy.

"In particular, there is currently a great deal of uncertainty about just how soft the manufacturing sector is and how much consumer spending has moderated. Furthermore, there are uncertainties relating to future sterling developments, oil price movements and the state of the global economy."

He added that, if the housing market slowdown showed signs of turning into a crash, "the odds will swing markedly in favour of the Bank of England's next move being a cut in interest rates".

Industry leaders said the Bank was right to keep rates on hold in the run-up to Christmas.

David Frost, director general of the British Chambers of Commerce (BCC), said: "This was clearly the minimum necessary for the economy. But, from a manufacturing perspective, it was still inadequate."

He said sterling's rise against the dollar was causing many problems for manufacturers and suggestions of another rise in 2005 were potentially harmful for manufacturing. UK companies trading in the United States have been hit by sterling's rise to its highest level against the dollar in 12 years.

CBI deputy director general John Cridland said: "Interest rates must be held until confidence returns to the economy." He added that there was an "unusual" amount of uncertainty about future prospects for oil prices, the US dollar and UK house prices.

TUC chief economist Ian Brinkley said that with industry pessimism on the rise, inflation low and house prices predicted to fall, a rate rise would have been unthinkable.

"If manufacturing doesn't turn the corner in the New Year, a cut in rates should be seriously considered," he said.

Steve Radley, chief economist of manufacturers' organisation EEF, said: "Whilst the Bank can afford to stay its hand into next year, strong headwinds are now being generated by an increasingly turbulent world economy.

"With manufacturers already being buffeted by increased costs and a weak dollar, if the outlook worsens they will look to the Bank for swift action to keep them off the rocks."