Bank sits on interest rates before expected election

Mervyn King, the governor of the Bank of England, admitted yesterday that he had been taken unawares by the weakness of consumer spending as he virtually ruled out an increase in interest rates before the election.

Speaking at a Treasury select committee meeting, Mr King said the Bank's monetary policy committee had noted that consumer spending was the biggest downside risk in its February inflation report but that it had turned out to be even weaker than anticipated.

"The pace of consumer spending has slowed quite markedly from where it was and where we thought it would be," said Mr King.

Recent data have shown retail sales slowing rapidly, a cooling housing market and a slowdown in car sales. This week the Office for National Statistics revised down the consumer spending component of fourth-quarter GDP to the weakest level for two years.

Economists said remarks by the governor and other members of the MPC seemed to suggest the Bank was happy to leave interest rates on hold until after the general election.

Howard Archer, an economist at Global Insight, said: "There is little indication that any of the four members testifying who voted to leave rates unchanged in March are about to change their mind.

"Indeed, the main conclusion that can be is that an interest rate hike is unlikely to happen as soon as April."

The Bank of England's monetary policy committee started raising the cost of borrowing in November 2003 from 3.5% and increased it to 4.75% last August. Since then, the MPC has left rates on hold.

Marian Bell, an MPC member and economist at Global Insight, said the weakness of inflation over the past few years indicated that "there is a better supply chain than previously thought". Despite the cost of oil increasing by 120% over the last two years and other commodity products reaching 15-year highs, there was little evidence of these costs being passed on to the consumer, she said.

Mr King acknowledged that the tight labour market meant that the MPC needed to keep a keen eye on rising wage packets as this could pose an inflationary threat. But he said there was no clear explanation of why wage inflation was subdued, despite employment levels reaching record highs.

The MPC expected the slowdown in consumer spending to be a temporary blip, said Mr King. He also emphasised the importance of not over-reacting to short-term data.