Bank keeps rates on hold

The Bank of England today left interest rates unchanged at 4% for the 11th month running against an increasingly gloomy economic backdrop.

Despite fears that the prolonged market slump will eventually erode consumer confidence, the Bank's nine-member monetary policy committee (MPC) decided against any further easing in borrowing costs.

Yesterday brought more bad economic news as Wall Street sank to a five-year low over continued worries about corporate profits.

Meanwhile, the United Nations warned that global output is to rise just 1.7% this year, while the office for national statistics reported that a 10% fall in sales to Europe's weak economies had led to the worst monthly trade deficit with Europe for nearly three and a half years.

The economic slowdown has been particularly brutal for Britain's manufacturers, as they struggle to recover from the worst manufacturing downturn in a decade.

Figures released earlier this week showed that industrial output ground to a halt in August despite a sharp rise in car production. The downbeat news dashed hopes for a second month of improvement after output bounced back strongly in July from the jubilee bank holiday shutdown in June.

But any lowering in borrowing costs risks feeding the bubble in house prices. Rising house prices and high personal borrowing were cited by the MPC as arguments against rate cuts in September.

"To reduce interest rates at this stage could give undue encouragement to households to accumulate yet more debt, and renew the upward pressure on house prices," the MPC said in the September minutes.

The most recent figures show house prices still gaining. Halifax, the country's biggest mortgage lender, reported earlier this month that house prices jumped 4.3% in September. Nationwide, another key lender, said prices rose 2.1%.

"Britain is not in a position to cut rates to aid the global economy, not when its housing market and consumer spending is doing what it's doing," said Daniel Gabay, an economist at investment bank JP Morgan in London.

Earlier in the year, the City thought that interest rates would have risen to 5% by now, but the weakness of the global economy has prevented any pre-emptive move to cool off consumer spending and house prices.

Instead, the expectation is that rates might have to come down further by the end of the year because of the risk of a slowdown. But the move is fraught with danger as it might throw further fuel on the fire for house prices.