Interest rates held for sixth month running

The Bank of England today disappointed retailers and manufacturers by holding rates at 4.5% for the sixth month running.

The decision was widely expected as the Bank awaits the outcome of current pay deals.

Most of the Bank's nine members on the monetary policy committee (MPC) want to see whether employees will push for pay claims to compensate for high petrol prices, increased utility bills and a bigger tax burden.

The decision will prove a disappointment for retailers and manufacturers, although with economic growth strengthening at the end of 2005 and a revival in house prices, a cut in borrowing costs would have been a major surprise.

Manufacturers cite the continuing weakness of the industrial sector. Figures from the Office for National Statistics (ONS) showed output falling in 2005 for the third time in five years, prompting David Kern, the economic adviser of the British Chambers of Commerce, to call for an interest rate cut "in the near future".

Meanwhile, retail sales figures this week showed that consumers ran out of steam after a Christmas flurry. The British Retail Consortium (BRC) said same-store sales were up just 0.2% in January - the weakest start to a year for more than a decade.

But the Bank wants to avoid any move that stokes another housing boom. The Nationwide building society reported a 1.4% rise in house prices in January while official figures showed mortgage lending and approvals for new loans both picking up.

Today, Halifax's closely watched survey showed annual inflation held at December's seven-month high, although a fall in house prices last month - the first in eight months - also cast doubt on a strong recovery in house prices.

Most analysts believe that the pickup in the housing market will not last because buyers will find it difficult to afford high prices at a time of weak earnings growth and higher bills.

Economists predict that a softening in house prices, coupled with below-trend economic growth will eventually push the MPC to cut rates in order to meet its inflation target of 2%. Under its symmetrical inflation mandate, the Bank has to avoid undershooting as well as overshooting its 2% goal.

"Indeed, if the committee does not cut interest rates soon, it may find itself presiding over a significant undershoot of the inflation target," said Roger Bootle, economic adviser to Deloitte. "I think that interest rates need to fall twice this year in order to support economic activity and keep inflation close to the 2% target."

So far those in favour of a steady-as-she goes policy hold a decisive majority. In the last two meetings only Stephen Nickell voted for a cut, and analysts will await with interest to see whether any of his colleagues have come round to his point of view.

There is speculation that Kate Barker is likely to join him as she also questioned last week whether economic growth would prove as strong as the central bank had forecast in November.

John Butler, an economist at HSBC, said: "The divisions within the committee centre on how confident they are about an economic recovery this year. The key will be whether any member, possibly Ms Barker or Charles Bean (the Bank's chief economist), join Mr Nickell in voting for a cut."