Bank keeps rates on hold

THE Bank of England kept interest rates on hold for the sixth month in a row today, but economists are warning it is only a brief respite for home owners.

The monetary policy committee voted to hold the rate at 4.75% following its two-day meeting as signs of a cooling economy and slowdown in spending convinced it not to hike rates further.

But with inflation figures edging close to the MPC's 2% target, yesterday's better than the expected manufacturing figures, solid fourth quarter economic growth and signs of life in the housing market, economists believe there could be scope for a further 0.25% hike this year.

Interest rates have risen five times from 3.5% since November 2003. John Butler, UK economist at HSBC, said: 'The housing market seems to be stabilising and wage growth is trending up. We believe the risk of a hike in the next few months is greater than a cut.'

Gerrard economist Simon Rubinsohn has pencilled in a further rate rise in May once first quarter figures have filtered through to the MPC.

Following yesterday's manufacturing figures, which showed an 0.6% rise for December, he said: 'Money markets sold off on the manufacturing numbers and are now pointing towards base rates rising to 5% during the first half of the year.'

Andrei Pogudin, bond strategist at Deutsche Bank added: 'The manufacturing sector in the UK is not doing as badly as it was feared. This means there is less chance of a rate cut in the UK in the coming months. In fact they may even hike rates if data continues to be strong.'

The City had speculated in December that the next direction for rate might be down after it emerged that High Street spending was suffering and the housing market appeared to have been cooled.

But figures from the Halifax showed prices rose 0.8% in January following 1.4% gains in December while mortgage rival Nationwide reported a 0.4% January increase and said the market was poised for a spring revival.

The City is also getting twitchy about inflation after a series of unexpected increases in recent months. Dearer household utility bills, furnishings, computer games and theatre tickets pushed inflation from 1.5% to 1.6% in December. Although still well below the 2% target, it was the highest for six months.

Consumer spending continues to be depressed, however. The British Retail Consortium said like-for-like sales were only 0.5% higher than a year ago in January.

However, any rise is unlikely to be before the end of the first quarter. BoE Governor Mervyn King's recent warning that it would be foolish to read too much into one month's set of economic data suggested that the MPC can afford to wait for a clearer economic picture to emerge before it moves on rates.

The Bank's five rate hikes in just over a year have added £851.10 a year to the cost of a 25-year £100,000 mortgage. An extra 0.25 percentage point increase would add a further £176.

Barclays Bank chairman Matt Barrett warned last year's interest rate rises could hit consumer confidence. He said: 'The coming year may see [economic] growth slower than the rate in 2004. Growth in the American and Chinese economies may moderate while in the UK interest rate rises during 2004 may have an impact on household spending.'

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