Friday, January 13, 2006

Interest rates left on hold for fifth month

Guardian Unlimited Money Special_reports
Ashley Seager Friday January 13, 2006 The Guardian

The Bank of England yesterday left interest rates at 4.5% for the fifth month running as manufacturing output expanded at its fastest pace in seven months.

Expectations are growing in the City, however, that the continued sluggishness of the economy could force the Bank to reduce borrowing costs again in the coming months.

By contrast, financial markets are expecting the European Central Bank, which also left interest rates on hold at 2.25% yesterday, to raise borrowing costs again, probably in March, as it seeks to contain inflation, which is running at 2.2% in the eurozone.

The Bank of England's monetary policy committee has made it clear that it is no hurry to move interest rates either way while it assesses the strength of consumer spending over the Christmas period and whether pay deals in the new year turn out to be inflationary.

But many in the City feel inflation is well under control and that consumer spending, which has driven the economy for years, has weakened, even if Christmas sales at retailers such as Marks & Spencer, Jessops and John Lewis have been better than expected.

With consumer confidence weak, debt levels high and new borrowing shrinking, few expect the signs of strength to persist. 'I am doubtful that a strong spending recovery will be sustained as other indicators of consumer activity have remained weak,' said Roger Bootle, head of the consultancy Capital Economics. 'I think there is a good chance that rates will be cut by 0.25% in February. And even if the committee holds back for longer, I still see interest rates falling to 4% by the end of the year."

Good news for landlords and the whole property market.

Chris Bell



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