Why UK rates will stay the same

The latest US rate cut, announced last night, is now the sixth successive time the Federal Reserve Bank has cut rates in an attempt to kick-start its flagging economy. The move was widely anticipated, and a further rate cut is still not out of the question.

The US interest rate decision is one is one of the most anticipated trading events across the globe, and there is undoubtedly a significant correlation between movements in the US stock market and movements in the market here, as well as abroad.

For one thing, the US stock market is the biggest in the world and many of the large companies listed on it operate on a global scale. This means that what happens on home turf has a wider impact.

But despite the fact that US decisions have an impact on our own economy, indications closer to home are that the Bank of England will resist following the US with further rate cuts. In fact, some analysts are now predicting it will raise rates.

The Bank of England's Monetary Policy Committee (MPC) will meet next week, and make an announcement on Thursday. Following it's decision last month to hold the base rate at 5.25%, most analysts were predicting a further cut this time round. However, the last few weeks has seen a raft of economic data released, showing that more cuts could lead to increased inflation above the government's target of 2.5%.

The first warning signs came with the release of the consumer prices indices two weeks ago, which showed an unexpectedly high rise in the all-items excluding mortgage interest payments index (RPIX) to an underlying inflation rate of 2.4%. The Bank of England bases its interest rate decisions on the RPIX and underlying inflation is now just below the bank's target.

The retail sales figures for May, issued by the Office of National Statistics two days later, showed a level of spending also much higher than analysts expected. Month-on-month sales were at their highest levels since September last year, partly as a result of warm weather bringing out shoppers in droves.

Recent figures also suggest there is no slowdown in the housing market, with a record number of mortgage applications being submitted in May.

All this data means the Bank of England is unlikely to cut rates at its next meeting, and is now likely to raise them by the end of the year.

However, the decision to raise rates will not be an easy one. While savers might thank the bank, the manufacturing sector is unlikely to. A hike in rates will mean more pain for exporters, as an interest rate rise tends to push up the value of sterling and make it more expensive for overseas companies to buy British goods. It will also increase borrowing costs for those businesses that are taking out loans in order to expand.

Union leaders are usually quick to condemn the Bank of England for reacting too quickly to short-term data in its decision making. This is one reason the MPC is likely to leave UK rates on hold this time round in order to "wait and see" for a little longer.