Bank of England keeps interest rates on hold, for now

The Bank of England yesterday left interest rates on hold at 4.5% but many economists said they felt it would cut them again before long.

The monetary policy committee reduced rates in August in response to weaker consumer spending and slowing economic growth but has since made clear it is disinclined to make another cut in the short term, especially as rising oil prices have pushed inflation above its 2% target.

World oil prices continued to fall back yesterday as concerns about shortages in the wake of Hurricane Katrina receded. US light crude futures traded down to as low as $63.10, nearly 10% off the record $70.85 set last week immediately after the storm. They later recovered to stand above $64 a barrel, down 22 cents on the day.

Most analysts expect crude prices will not fall much further because of continuing shortages of petrol, as many of the Gulf coast's refineries remain out of action.

The Bank of England's decision had been widely expected in the financial markets, especially as the minutes of the August meeting had shown the nine-member body voted only 5-4 in favour of reducing borrowing costs, with the Bank of England's governor, Mervyn King, favouring rates remaining at 4.75% because he was concerned about inflation, which has risen to 2.3%.

Many commentators, however, feel the economy will continue to weaken as consumer spending remains un certain and unemployment continues to edge up, although there have been signs that the housing market may be stabilising and manufacturing output is recovering.

Roger Bootle, the head of the consultancy Capital Economics, said he felt interest rates were headed back to 3.5%, the low they hit in 2003, probably some time next year. He said the Bank always moved rates several times rather than once, and a quarter-point cut was not enough to counteract the economy's weakness.

"The latest news on the high street suggests the consumer slowdown has become entrenched [and] consumer spending is being put under further pressure by a softening labour market," he said, adding he felt the rise in inflation would prove temporary.

Philip Shaw, at Investec bank, said the US economy might be weakened by the hurricane and higher petrol prices. "The chances of an external slowdown have risen and this underscores our forecast that UK rates will fall again next year. Our mid-2006 target remains at 4%."