Bank keeps interest rates at 4.5%

The Bank of England today left interest rates unchanged at 4.5% for the eighth month running amid concerns over rising house and energy prices.

The Bank's monetary policy committee (MPC) has signalled that it is in no hurry to cut borrowing costs until it emerges whether higher utility bills have led to higher pay claims.

A pickup in house prices has also strengthened reluctance to lower borrowing costs. The Halifax bank today reported a 0.9% jump in house prices last month, taking the annual rate to 6.2%, its highest level in 11 months.

"For now at least, the Bank of England will be very wary that a trimming of interest rates could excessively stimulate the housing market and risk send housing prices markedly higher," said Howard Archer of Global Insight.

The annual inflation rate is currently 2%, right on the Bank of England's target. The MPC last lowered borrowing costs in August in 2005, when there were signs of a dramatic slowdown in consumer spending.

Since then, only one of the MPC's nine members, Stephen Nickell - who is leaving the MPC next month - has argued for a reduction in rates on the grounds that the Bank's growth forecasts are too optimistic.

The Bank is forecasting growth of 2.7% for this year, while most City forecasts are well below that - around 2.2%. Data released yesterday cast further doubt on UK growth prospects.

Figures from the Chartered Institute of Surveyors showed weaker service sector growth than expected for February while the Office for National Statistics reported an unexpected drop in manufacturing output for March.

While the figures raise questions about growth prospects later in the year, the indications are nevertheless that economic growth will be on target in the first quarter.

Once rising energy and housing prices are thrown into the mix, it was no surprise that the Bank stuck to its guns yet again. The question is whether the MPC will be forced to cut rates later in the year. That will depend on whether the economy meets the Bank's growth forecasts.

"Future growth still depends critically on developments in consumer spending, and we suspect that this will be relatively muted over the coming months," said Mr Archer, who believes that the Bank will cut borrowing costs this year, although not before August.

This week's MPC meeting was one member short with the early departure of one of the MPC's external members. Richard Lambert resigned on conflict of interest grounds after accepting the job of director-general of the business lobby group, the CBI.

It is the first time since September 2002 that the MPC has been under strength. If there is a 4-4 tie, the governor Mervyn King has a casting vote.