Bank leaves interest rates unchanged

The Bank of England today left interest rates unchanged at 4.5% for the 11th month in a row amid further signs of a cooling in house prices.

The decision, made by the monetary policy committee, was in line with expectations.

Minutes of the MPC's June meeting and last week's parliamentary testimony by some of its members indicated that the Bank was in no hurry to raise rates, despite inflation currently standing at 2.2% - just above its 2% target.

The Bank's governor, Mervyn King, last week told MPs that a weaker stock market and the strength of the pound had eased inflationary fears. He said wage growth remained muted, despite rising energy and fuel bills.

Before the MPC's decision was announced, the Halifax bank reported a surprise 1.2% drop in house prices in June.

In its monthly house price survey, Britain's biggest mortgage lender said the three-month annual increase in house prices was 9.4%, but was likely to ease over the coming months because comparable figures for last year were so strong.

"Pressure on householders' finances from utility bill and council tax rises, combined with speculation of higher interest rates, are also likely to constrain demand," Halifax economist Martin Ellis said.

The Halifax data followed Nationwide figures showing that house prices had risen by a relatively modest 0.3% in June following increases of 0.2% in May and 0.1% April.

The softer housing market should allay Bank concerns about a key sector of the UK economy overheating.

"The latest data from the Halifax and Nationwide are consistent with our long-held belief that house prices are likely to settle back into an extended period of relatively modest rises," Howard Archer, of the consultancy Global Insight, said.

In further evidence of a "rebalancing" of the economy, manufacturing output rose faster than expected in May.

Data from the Office for National Statistics showed it had risen by 0.5% compared with City forecasts of a 0.3% increase. That left manufacturing output 0.9% higher than a year earlier.

"With the economy showing signs of rebalancing away from the consumer and towards investment and trade, it is moving in exactly the direction the Bank would want," Steve Radley, the chief economist of the Engineering Employers' Federation, said. "For the time being, there is no need to risk rocking the boat with a move in either direction."

The Bank has been waiting for industrial production and manufacturing to pick up the slack as consumer spending softens, and today's figures provided further confirmation that the sector's recovery remains on track.

"May's rebound in manufacturing production boosts hopes that growth can become more balanced on an extended basis," Mr Archer said. "It will also reinforce belief that the next move in interest rates is up, although the Bank of England currently seems unlikely to act in the near term."

Most economists are predicting a 7-0 vote in favour of leaving rates unchanged from this week's meeting.

The MPC is two members down after the sudden death last month of David Walton, the only member to call for a rate hike in recent months, and the Treasury's failure to so far name a replacement for Richard Lambert, now director-general of the CBI.