Rates on hold as consumer spending goes off the boil

The Bank of England left interest rates steady at 4.75% yesterday amid speculation in the City that it would not raise them again this year as evidence grows that consumer spending and the housing market have come off the boil.

The Bank has raised borrowing costs in five quarter point moves since last November, most recently in August, in an attempt to prevent a rapidly growing economy overheating. The medicine appears to have started to work with mortgage approvals slowing rapidly and house prices starting to fall, on the Halifax monthly measure at least.

"Whereas consumers have previously appeared resilient to higher interest rates, it now seems as if they are beginning to feel the squeeze," said Roger Bootle, economic adviser to Deloitte & Touche.

It was still quite possible that the Bank would raise rates to 5% if the housing market rebounded but he felt it could be cutting them again a year from now.

Most economists think the Bank may nudge rates up by another quarter-point at its November meeting, coinciding with its quarterly inflation report, but a growing number think rates may have peaked.

"The MPC continues to walk a tightrope between engineering a soft landing for the housing market and consumer spending on the one hand and precipitating a housing crash and a more abrupt economic slowdown on the other," said Andrew Smith, chief economist at KPMG.

Ray Boulger of mortgage broker Charcol said the string of interest rate rises, combined with comments from the Bank's governor, Mervyn King, in June that house prices could actually fall, had dampened the housing market and the economy more generally.

"Any decision other than a rate freeze would have been a major shock. The real question on everybody's lips now is whether or not base rates have peaked. All the signs point to this being the case, or at worst, there being only one more quarter point increase to come," Mr Boulger said

Industry was quick to welcome the Bank's decision: "Business is relieved that the Bank has not seen fit to raise rates yet again. Recent news suggests that growth has slowed around the world and that UK and consumers are being more cautious," said CBI chief economist Ian McCafferty.

Figures this week showed manufacturing output fell for the second month in a row in July, raising fears that the sector's recovery was running out of steam.