Bank of England set to freeze interest rates

Thursday, 5 June 2008 7:00 AM

The Bank of England looks set to continue its freeze on interest rates today at five per cent.

The central bank's monetary policy committee (MPC) will announce its decision on interest rates at midday amid soaring inflation and a slowing economy.

Usually the MPC responds to high inflation by raising interest rates - making borrowing harder and saving more rewarding and so cutting people's propensity to spend.

However, the current slowing of the economy and falling house prices, along with lending restrictions brought on by the credit crunch, demand a cutting of interest rates to stimulate spending.

Yesterday the OECD called on central banks to hold interest rates ahead of the gloomy economic times and high inflation ahead.

UK inflation - measured on the consumer prices index (CPI) - now stands at three per cent and the MPC expects it to rise further, despite there being a government target of two per cent.

The sudden rise in inflation - boosted by rising oil, energy and food prices - has caught many analysts off-guard and meant predictions of interest rates falling through 2008 had to be shelved.

"Only a few weeks ago, it seemed highly possible that the Bank of England would be cutting interest rates from 5.00 per cent to 4.75 per cent on Thursday," said Howard Archer, chief UK economist at Global Insight.

"Those hopes have now gone out of the window, and it appears to be a stone dead certainty that interest rates will remain at five per cent, even though the economy continues to weaken and house prices are currently heading south at an increasing rate."

Mr Archer went on to predict an eventual interest rate cut in August at the earliest, and rate to fall to four per cent by mid-2009.

The MPC last cut interest rates in April, after reductions in the base rate in February and December.

Daniel Barnes

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