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Interest rates stay on hold

Thursday, 9 February 2006 12:00 AM

The Bank of England today maintained interest rates at their current level for the sixth month in a row.

Interest rates have remained at 4.5 per cent since August 2005, when the Bank's Monetary Policy Committee (MPC) last cut rates by 0.25 per cent.

That interest rate cut prompted a mini-revival in the housing market, which in turn makes further interest rate cuts less likely.

"The recovery in the housing market since last summer has been maintained," said Milan Khatri, chief economist for the Royal Institution of Chartered Surveyors (RICS).

"The number of new buyers has risen for seven consecutive months, while the number of property sales has risen by 13 per cent over the past year. The more positive tone of the housing market has also bolstered spending on the higher street."

The MPC raises and lowers the base rate of borrowing in the UK - affecting millions of mortgages - in an attempt to keep inflation as close as possible to the government's two per cent target.

The minutes to last month's MPC meeting stated that inflation was broadly in line with the target, making a cut in rates unlikely.

Alliance & Leicester's Mehrdad Yousefi said: "Today's decision to maintain base rate at 4.5 per cent comes as no surprise."

And Lloyds TSB's Trevor Williams said: "The MPC was unlikely to decrease rates today with house price inflation set to rise further in the coming months. Strengthening retail sales, services and manufacturing - and the fact that inflation remains on target at two per cent will also have helped discourage a cut."

RICS' Mr Khatri added that the Bank should "examine the need for a spring-time interest rate cut".

Global Insight's Howard Archer predicts a rate-cut in May. "We believe that the chances of an interest rate cut before the second quarter have receded recently, given recent overall evidence of modestly stronger economic activity and a more robust housing market."

He added: "Consequently, we expect the Bank of England to eventually trim interest rates by a further 25 basis points, most probably in May."

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