Bank holds interest rates at 4.75%

There were no last-minute surprises from the Bank of England today as interest rates were frozen at 4.75% for the second month running.

The Bank's Monetary Policy Committee (MPC) appears to have been persuaded that the five rate rises since last November have finally resulted in a cooling of the economy, particularly of house price growth and consumer spending.

Figures yesterday showing that manufacturing output unexpectedly suffered its third monthly slump in a row in August - at 0.8% the sharpest rate for nearly two years - had led analysts to all but write off the chances of a rise today.

In the light of yesterday's figures, the private sector union Amicus called on the MPC not to raise rates for the rest of the year. Its general secretary, Derek Simpson, said: "Urgent measures are needed to revitalise the UK's manufacturing recovery.

"We are calling on the MPC to hold their nerve and not be distracted by house price hysteria and focus on generating productivity and jobs."

Even before the release of the manufacturing figures not one of the 41 analysts polled by Reuters last week had expected the MPC to do anything other than leave rates unchanged this month.

Last month the vast majority were predicting a further rise in November, but most are now speculating that the hike in August of 0.25 basis points will prove to be the last of 2004.

"We think that faced with a slowdown on several fronts the MPC will not feel the need to hike rates further this year," said Philip Shaw, chief economist at Investec.

Simon Rubinsohn of stockbrokers Gerard agreed. "We now believe it is improbable rates will be raised again this side of the new year," he said.

Despite yesterday's surprise finding from Halifax that house prices had risen 1.4% in September, there has been growing evidence since August that the housing market has cooled.

And the National Institute of Economic and Social Research yesterday estimated that the UK economy had grown by only 0.4% in the third quarter, down from 0.9% in the second. In its last inflation report, in August, the Bank of England predicted the 0.9% rate would continue into the third quarter.

Economists are now increasingly suggesting that the present interest rate level of 4.75% might even mark the peak of the current cycle, even though it is far lower than the top of recent economic cycles.

It is also below most estimates of the so-called neutral level of rates, at which point policy is neither expansionary nor restrictive. But Kate Barker, an MPC member, said last week that although it had been clear interest rates were below neutral in November 2003, when they stood at 3.5%, some of the committee were not so sure this was still the case.

John Butler, UK economist at HSBC, echoed those sentiments: "Although it is too early to call this the peak in the rate cycle, the data does need to start improving and improving soon," he said.