Interest rates unchanged as economy perks up

The Bank of England held interest rates at 3.5% today, amid evidence of an economic rebound.

Under the Bank's new governor, Mervyn King, its monetary policy committee (MPC) surprised the markets last month when it sprang a 0.25% cut on unsuspecting traders, pushing the cost of borrowing to a new 48-year low.

Since then, however, the committee's fears of a slowdown have not been borne out by recent economic data. This week, Halifax, Britain's biggest mortgage lender, reported that house prices moved ahead strongly in July, confounding forecasts of a property market crash.

Meanwhile, the services sector expanded last month at its fastest rate for a year. Service sector companies, which include transport and computing firms as well as hotels and restaurants, increased output in July for the fourth month in a row. That was the fastest pace of growth since last May, according to the Chartered Institute of Purchasing and Supply.

Even the hard-hit manufacturing sector is showing signs of bottoming out. Hot weather helped boost industry in June, with industrial production rising by 0.7% as demand for electricity to cool offices and homes increased.

Manufacturing companies reported a 0.2% rise over the month, higher than expectations of a 0.1% increase. The boost came from strong rises in output from weapons and ammunition firms re-stocking after the war, and a 9.2% rise in car production.

Consumer debt hit a record ?10bn in June, which will set alarm bells ringing at the Bank, concerned as it is at the Britain's over-reliance on the willingness of its citizens to spend, spend, spend and keep economic expansion going.

With signs that the economy is perking up, analysts believe that the next move on interest rates will be up. But the MPC, which voted 8-1 last month to lower rates, is not expected to raise the cost of borrowing until the middle of next year so as not to jeopardise a precarious recovery.

"This decision was not a surprise. But the Bank must be ready to act if the exchange rate strengthens further or the European Central Bank cuts rates in the Eurozone. We cannot risk the future competitiveness of manufacturing by allowing the gap between interest rate levels in the UK and in Europe to get any bigger," Ian Brinkley, the TUC's senior economist said.