Interest rates stay at 3.5% amid signs of recovery

Signs of a summer recovery in the economy prompted the Bank of England to hold borrowing costs at the 48-year low of 3.5% yesterday, despite worries that growth may fall short of its expectations this year.

After surprising the markets with a 25 basis point cut in July, the Bank's monetary policy committee was widely expected to sit on its hands this month.

"It would have taken a significant further deterioration in the economic outlook to have prompted another reduction quite so soon," said Jonathan Loynes at Capital Economics.

The Bank faces a challenging task keeping the economy afloat without encouraging households into a renewed burst of debt-fuelled spending. Last week government figures revealed households stacked up a record amount of borrowing in June.

"A record £10bn surge in consumer credit is hardly indicative of waning consumer demand and will have served to persuade the MPC that recovery is more firmly rooted than was previously thought," said Ross Walker, UK economist at the Royal Bank of Scotland.

Rising retail sales, a rebound in the housing market and a pick-up in the battered manufacturing sector have raised hopes that the economy has pulled through the worst after grinding to a halt in the first half of the year.

But Mr Loynes said it was premature to rule out further cuts to borrowing costs.

"We think the pace of growth will disappoint later in the year as the housing market and consumer spending slows," he said. "At the same time, inflation will continue to fall."

Industry leaders called a temporary truce in their campaign for lower rates.

"The Bank is right to take the breathing space afforded by last month's cut and assess how the economy develops through the autumn," said EEF deputy chief economist, Dougie Peedle.
"There are tentative signs that the global economy is beginning to show signs of life and manufacturers will hope that this is translated into stronger demand in the second half of the year."

Further clues to the Bank's decision will be revealed next week when it publishes its quarterly inflation report. After the economy notched up growth of just 0.1 and 0.2% in the first two quarters, most economists expect the Bank to revise down its forecast for growth of 2.3%.

House prices increased by almost 13% in England and Wales in the past year, government figures showed yesterday. The Land Registry figures point to the housing market easing after the 20% increase it recorded in the first three months of the year.

However, more up to date figures from mortgage lenders suggest warm weather has encouraged a summer time price spurt. Earlier in the week, Halifax said house prices rose by 1.3% in July.