City sees no pre-election rate rise

The prospect of interest rates being left on hold until after a spring general election rose yesterday after the Bank of England kept borrowing costs unchanged at 4.75%.

Amid recent mixed signals over the health of the economy, the Bank's nine-strong monetary policy committee pleased industry leaders and the TUC by leaving rates where they have been since last August.

City economists said a clearer idea of the Bank's thinking would emerge with the release of its quarterly inflation report next week, but with an election looming and the economy hard to read, most analysts believe the chances of an early move are small.

Ian McCafferty, the CBI's chief economist, said: "Consumers appear to have pulled in their horns over the holiday period, and exporters are struggling with the strength of sterling. However, the broader economy continues to show healthy growth, and the tight labour market and buoyant commodity prices are nudging inflation higher. Rates are likely to stay on hold for some months yet."

The British Retail Consortium urged the Bank to consider a cut in rates as it reported that the need to clear stock in January prompted big price cuts in shops.

Prices in January were 1.54% lower than a year earlier. That was the biggest drop recorded in the seven years of its survey.

Kevin Hawkins, the BRC's director general, said: "This is the fourth consecutive month in which retail prices have fallen. However, consumer confidence remains weak and the Bank of England must seriously consider a gradual reduction in interest rates - any further increases simply cannot be justified."

The cost-conscious approach being taken by consumers has, however, been balanced by signs that the housing market may have stabilised and that the weakness in manufacturing at the end of last year was less pronounced than originally believed.

Graeme Leach, chief economist at the Institute of Directors, said the Bank might eventually need to push rates up to 5%. "Over the past month we have seen conflicting signals and it is entirely sensible that the MPC keeps its powder dry for a little longer. But this does not mean that we have seen the end of interest rate rises. There is still a possibility of one more quarter-point rate rise in the current cycle."

David Frost, director general of the British Chambers of Commerce, said "the clamour in some quarters for early interest rate increases" should be resisted. "Although fourth-quarter GDP growth was slightly better than expected, and the housing market is not weakening as sharply as feared, the underlying slowdown in growth is probably continuing."

The EEF, the manufacturers' organisation, said there was a strong case for leaving interest rates on hold for the foreseeable future. It chief economist, Steve Radley, said: "Unless the outlook changes significantly, business will welcome an extended period of stability in interest rates."