City sceptical of rates freeze

The City was bracing itself last night for a fresh rise in interest rates as early as next month after viewing the Bank of England's decision yesterday to peg borrowing costs at 4% as a temporary respite for industry and homeowners.

Business groups reacted with relief after the Bank announced its nine-strong monetary policy committee had voted for the status quo at its monthly meeting.

City economists, however, said that the underlying strength of the economy, booming property prices and tentative evidence of higher prices in the shops meant the next upward move in interest rates was likely within two months and the trend could continue in the run-up to the expected general election date of summer next year.

Minutes of yesterday's meeting will be published on March 17, budget day, and analysts said that the chances of an April move would increase if it was found that a significant minority of the MPC had already called for tighter monetary policy this month.

Simon Rubinsohn, an economist at City firm Gerrard, said: "A further hike in base rates is conceivable as early as next month."

Predicting that borrowing costs might reach 5.5% or more during 2005, he added: "The strength of sterling may encourage the MPC to tread a bit more warily than would otherwise be the case, but with the UK economy now firing on all cylinders (even business investment is in the process of picking up), further base rates rises (in excess of what the market is currently expecting) appear increasingly likely."

The overwhelming majority of City analysts had expected the MPC to leave rates on hold, maintaining its recent cautious habit of raising the cost of borrowing by a quarter point to coincide with the publication of the Bank's quarterly economic forecasts.

Howard Archer, of consultancy and forecasting firm Global Insight, said the decision came as no surprise. "On balance, we still expect the next 25 basis point hike to come in May.

"However, April remains a very realistic possibility given the overall robustness of the economy - in particular the continuing strength of consumer borrowing and spending, as well as the housing market. We expect the interest rate to reach 4.75% by the end of this year and then to move up to 5.0% in the first quarter of 2005."

After rates hit a 48-year low of 3.5% last summer, the Bank increased them in two steps in November and February, arguing that was needed to prevent inflation from rising above the government's 2% target.

The CBI's chief economic adviser, Ian McCafferty, said: "The Bank is right to maintain its gradualist approach to rate rises. A second successive rise would have surprised business and the financial markets, undermining business confidence."