Bank sits on rates to flatten economy's fizz

The longer the Bank of England leaves rates on hold, the greater are the expectations that its next move will be to start cutting borrowing costs from the current level of 6%. Today's decision by the bank's monetary policy committee to leave the main lever for controlling the speed of the economy unchanged makes it the fifth month in a row that its members have sat on their hands. Nobody was particularly surprised - all the indicators since the MPC last met suggest that the economy is slowing down - house prices are falling, retail sales growth has slowed and wage inflation is falling back.

The bank's job is to keep inflation excluding mortgage interest payments, the underlying measure, at 2.5%, a target it has undershot for more than a year. However, the City is not yet ready to call a peak to the interest-rate cycle. Some believe that inflation in the UK economy has only been kept in check by sterling's high levels against other world currencies. A robust currency strangles manufacturing exports and makes imports of raw fuels and materials cheaper, which in turn keeps price pressures down.

Sterling is no longer in such robust form - since May it has slipped by nearly 10% against the currencies of Britain's major trading partners and it is now trading at the equivalent of DM3.10. However, by historic standards this is still quite high - when Britain joined the Exchange Rate Mechanism in 1990, DM2.95 was considered a sustainable rate, but in the event it proved cripplingly high for most exporters.

Three of the MPC members favoured raising rates at their last meeting, according to the minutes issued two weeks after the decision. Part of their argument was that the pound's fall had loosened the external choke on the economy and there was a danger of inflation creeping up again. However since the June meeting other indicators have suggested that the domestic economy is losing some of its fizz. If the MPC are satisfied that they have done enough to cool things off, then interest rates could be on hold for some time to come.