Bank leaves rates on hold

The Bank of England's monetary policy committee (MPC) today left interest rates unchanged for the second month running, waiting to see whether the economy will bounce back from recent problems.

Interest rates were left at 3.75% - their lowest in 38 years - despite a recent spate of negative economic news.

Consumer and business confidence took a knock before the start of the Iraq war, with the Confederation of British Industry reporting the steepest fall in retail sales in nearly 11 years in March.

But economists wondered whether confidence might recover now that US and British forces appear to have all but toppled Saddam Hussein, banishing fears of a protracted and costly war.

The Bank appears to have taken a similar wait-and-see attitude, holding off until it publishes its new economic forecasts in the May inflation report.

The MPC surprised markets in February when it cut rates to 3.75%, blaming weaker prospects for demand at home and abroad as the then-threat of war in Iraq clouded the economic outlook. Since then, however, inflation has picked up and last month the MPC even discussed the need for higher interest rates.

After it hit a five-year high of 3% in February, the MPC now expects inflation to rise even further above the Treasury-set target of 2.5% in the coming months, due to a fall in the pound and rises in taxes and petrol prices.

Despite the predicted bounce in inflation, which the Bank believes will be temporary, economists expect the MPC to cut rates later in the year because of its determination to support economic growth. But that will be a tough job, with many analysts fearing that Germany and the US could be heading into recession.

In his Budget yesterday the chancellor, Gordon Brown, forecast growth of between 2% and 2.5% for this year; a downgrade from previous estimates of 2.5% - 3%.

Many analysts think those estimates are too optimistic. If they prove to be so, the Bank will come under pressure to stimulate growth through further cuts in interest rates.

"Continued sub-trend growth throughout 2003 should yield further monetary easing from the Bank of England, which we expect to cut rates by 0.25% at its May meeting," Deutsche Bank said in a research note.

"After a May move, we see a further cumulative 0.5% of easing in the second half of 2003 - early 2004."