Interest rate held as growth picks up

Interest rates were put on hold yesterday amid signs that seven cuts in the cost of borrowing since October have fuelled a boom in the housing market in the south and a resumption of economic growth.

With sterling showing signs of weakness against the dollar on the foreign exchanges, threatening to increase import prices, the Bank of England's monetary policy committee voted to leave its benchmark lending rate at 5%.

The nine-strong committee gave no reasons for the decision, which will be explained by minutes of the meeting to be published in two weeks.

The City believes that having succeeded in stimulating activity the MPC will eventually switch its attention to heading off a rise in inflation, which it is charged by the government with keeping at 2.5%.

But most economists say it is premature to conclude that the next move in borrowing costs will be up. Despite rapidly rising house prices in London and the south-east, prices overall remain relatively subdued. The latest Halifax house price index shows prices rising nationally at an annual rate of 6.6%, compared with a peak of more than 30% in the late 1980s.

Moreover, sterling's persistent strength against the euro - which cuts import prices and restrains export sales to Britain's largest market - and weakening wage growth suggest that borrowing costs may have further to fall.

"Activity is picking up and the Bank may want to take stock," said Glenn Davies, chief economist at Credit Lyonnais Securities. "But the pressures bearing down on inflation are intense. I think the Bank will cut again in August."

Inflation data issued last month showed that the government's target measure, which strips out mortgage interest payments, fell to 2.1% in May. Analysts say the economy's recent spell in the doldrums suggests that short-term inflation prospects remain excellent.

John Shepperd, economist at Dresdner Kleinwort Benson, said: "Gordon Brown has emphasised the Bank of England has one target and that is inflation. So we see rates coming down to 4.5% this year and 4% next year."

The weakness of inflationary pressure was underlined by yesterday's survey from the British Retail Consortium, which represents big retailers. It showed average prices of the 200 most commonly bought goods on the high street fell by 0.7% in June compared with a year ago.

Employers' organisations backed the decision to leave rates unchanged, but urged the committee to remain alert to the plight of industry, which was still struggling with the strong pound.

Union bosses were more critical. Roger Lyons, general secretary of the MSF union, accused the MPC of perpetuating the monthly haemorrhage of manufacturing job losses by not cutting rates further immediately.