Bank holds interest rates

The Bank of England today held interest rates at 4.75% for the 11th month running in a decision overshadowed by a series of suspected terrorist attacks in London that sent markets reeling.

The Bank's monetary policy committee (MPC) maintained borrowing costs at their current levels despite growing pressure from industry.

This week, the British Chambers of Commerce and the National Institute for Economic and Social Research, a leading thinktank, as well as the CBI, called for the Bank to begin cutting the cost of borrowing.

Markets reacted badly to the decision, plunging 182 points - 3.5 % - to 5,047.3. Investors were clearly disappointed at the Bank's decision to hold rates, despite the inevitable blow to confidence from today's explosions in London.

Analysts said the decision to leave interest rates unchanged was likely to have been a close run thing, and added that they expected a 25 basis point cut next month.

"By then, the MPC is likely to have confirmation that growth remained clearly below trend in the second quarter, extending the significant slowdown in activity since mid-2004," Howard Archer, the chief UK economist at the consultancy Global Insight, said.

"Meanwhile, serious concerns persist over the strength of consumer spending going forward, as well as the ability of other sectors of the economy to compensate for this,"

Two of the Bank's nine MPC members wanted a cut last month. Marian Bell has since left the committee, but analysts believe others are likely to have joined chief economist Charles Bean's call for lower rates as new figures showed the economy has slowed sharply.

Policymakers have been surprised by the speed of the slowdown in retail sales, but in last week's meeting the majority still clung to the hope that the weakness in consumer spending might prove to be temporary.

The British Retail Consortium's monthly survey this week suggested that sales had picked up in the second half of the month as a heatwave and early discounting enticed Britons back to the shops.

Mervyn King, the Bank's governor, is also clearly worried about the risks of rising inflation, which is currently running just below the central bank's target of 2.0%.

In another sign of a softer economy, house prices rose by just 0.1% in June, while the three-month annual rate of increase slowed to 3.7%, its lowest level since March 2001, the Halifax said in its monthly house price survey.