A good economic scenario for UK economic growth. The next move in rates very much depends on the housing market as inflation is well under control
Bank of England Holds Interest Rate at 4.75 Percent
Feb. 10 (Bloomberg) – The Bank of England left its benchmark interest rate at a three-year high of 4.75 percent as growth in Europe’s second-largest economy accelerates without stoking inflation.
The Monetary Policy Committee kept the repo rate unchanged for a sixth month, as predicted by all 40 economists surveyed by Bloomberg on Feb. 3-4, leaving borrowing costs static for the longest period since 2003.
A rebound in factory output at the end of last year helped sustain Britain’s longest period of economic expansion since the Industrial Revolution, lifting economic growth to 0.7 percent in the fourth quarter. While growth picks up, inflation has remained below the central bank’s 2 percent target and higher borrowing costs have cooled a five-year housing boom.
A rate hike would have been premature,'' said Melanie Baker, a U.K. economist at Morgan Stanley in London who doesn't expect the central bank to raise rates until February 2006. We are expecting growth to come off in the first half. Wage pressures look relatively contained.‘’
There was little market reaction to the decision, with the pound trading at $1.8588 as of 12:26 p.m. in London after rising as high as $1.8628 earlier. The rate on the three-month futures contract maturing in June was at 4.95 percent in London at 10:20 a.m., above the current money-market rate of 4.88 percent.
Rate Expectations
The Bank of England raised interest rates five times in the 10 months through August last year. Thirteen out of 28 economists in the Bloomberg survey predicted rates will rise further. The other 15 forecast rates have peaked.
The government’s latest calculation of fourth-quarter economic growth was in line with the Bank of England’s forecast, given in November. The central bank expects the U.K. economy to expand 2.5 percent this year and 2.7 percent next.
Consumer price inflation has held below the Bank of England’s 2 percent target since 1998, last month coming in at 1.6 percent. MPC member Stephen Nickell said in a paper published on Jan. 27 the inflation rate will rise close'' to the bank's 2 percent target in a couple of years,‘’ in line with the Monetary Policy Committee’s November forecasts.
Given the outlook for inflation and growth, the minutes of the rate-setting committee’s Jan. 12 to 13 meeting made no mention of a rate increase or cut, and the committee voted unanimously to keep rates unchanged.
`Wait and See’
It's a question of wait and see what happens to the housing market, the consumer and the global economy,'' said Mike Taylor, an economist at Merrill Lynch in London. Inflation is well under control. There’s no need for tighter monetary policy.‘’
The minutes to the MPC meeting held yesterday and today will be published on Feb. 23. Before that the rate-setting committee will release its latest growth and inflation forecasts, amid indications neither gross domestic product nor consumer price growth have deviated far from the bank’s November estimates.
Some investors began to speculate the bank’s next move would be to cut rates after government figures released Jan. 21 showed a 1 percent decline in December retail sales, the worst figure for that month in almost a quarter century. Yet central bank said in its January minutes that it saw no evidence of a significant change in consumption growth and that house price indicators were stronger than it expected in its November Inflation Report.
That’s been borne out by subsequent reports. House prices gained for a second month in January, HBOS Plc reported on Feb. 3, while Nationwide Building Society, the biggest customer-owned lender, said on Jan. 27 that prices rose 0.4 percent last month.
Factory production climbed 0.6 percent last month, the fastest pace since May, after a revised 0.2 percent gain in November, the Office for National Statistics said yesterday. Industrial production, which includes mining and utilities, expanded a monthly 0.5 percent, following a revised 0.4 percent increase in November, the office said.
Currently the economic data suggests that the bank should continue to sit on its hands,'' said Steve Radley, chief economist at EEF, a trade body that represents manufacturers. Unless the outlook changes significantly, business will welcome an extended period of stability in interest rates.‘’