Interest rates remain at 5.75%

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by Kay Murchie

Interest rates have now been held for the second consecutive month following 5 increases since August 2006. The decision to keep the base rate at 5.75% was expected by analysts.

A spokesperson for Global Insight remarked that the decision by the Bank of England to sit tight for now was due to the ongoing problems and uncertainties in the credit and financial markets.

The Monetary Policy Committee’s (MPC) main consideration is the level of UK inflation as measured by the increase in the Consumer Price Index (CPI). This fell below the Bank’s 2% target for the first time in more than 12 months in July, slipping back to 1.9% on significant declines in food costs and prices of furniture.

There has been evidence of strong activity in the manufacturing and service sectors of the economy this week and signs that the recent rate rises are beginning to dampen the housing market.

According to the Halifax, property prices have risen by 0.4% during August - just half the rate of July. Halifax declared that property prices had risen by just 1.6% during the three months to the end of August, compared with a gain of 4.5% in the first quarter of 2007.

Retailers have been urging the MPC to contemplate a reduction in interest rates after High Street sales remained weak in August. Like-for-like retail sales rose by 1.8% in August, ahead of the 1.2% increase noted in July, but well below the 2.5% growth seen in the same month in 2006 according to the British Retail Consortium (BRC).

The Bank’s latest quarterly report declares that interest rates will have to increase to 6% to keep inflation at 2% in the long-term. However, the minutes of the MPC’s August meeting said most members had ‘no clear view’ whether they would need to rise again.