Fear of property boom kept interest rate on hold

Fears that lower interest rates would stoke a fresh boom in the property market helped keep borrowing costs on hold at 4.5% this month, the Bank of England revealed yesterday. Minutes of the rate-setting meeting of the monetary policy committee held a fortnight ago showed only one of the nine members - Steve Nickell - voted for a quarter-point cut.

The City had been expecting at least one other MPC member to side with Mr Nickell, but said the majority's arguments in favour of caution had been strengthened by yesterday's snapshot of conditions facing industry from the CBI.

In its monthly survey, the employers' organisation said manufacturers' total order books had improved to a level not seen for 10 months and that confidence about future demand would lead to modest output growth over the next few months. A third of the 785 firms questioned (33%) said they were likely to increase production while 23% said they would cut it. The 10-point gap was the biggest for a year, the CBI said.

"With energy costs up sharply in recent months, and some disappointing developments in the global economy, there is no doubt that UK manufacturers still face a challenging business environment," said chief economist Ian McCafferty. "Nevertheless, this survey provides some encouraging news. Demand conditions facing the sector are the best for nearly a year. And if respondents' expectations are realised, the decline in output through 2005 may finally be coming to an end."

In the City, the pound rose and the odds on an early cut in interest rates lengthened after what were considered a "hawkish" set of minutes from the Bank. Analysts had expected Mr Nickell to continue his struggle for lower rates but had thought he might be supported by another committee member, Kate Barker.

Mr Nickell cited the "fall in GDP growth below its historical trend for much of the past 18 months, the recent rise in unemployment and the surveys of capacity utilisation" as evidence that there was enough slack in the economy to justify a move. "While the outlook for consumption had improved over the recent past, the central projection for consumption and investment appeared too optimistic," the minutes record him as saying.

The rest of the MPC was concerned about the impact of rising energy prices on inflation, and said the weakness of consumption in the first half of 2005 "appeared to have abated". The majority judged "that a reduction in interest rates at this stage would provide further support to the housing market and consumption at a time when GDP growth was already strengthening, and that would increase the probability of inflation rising above the target in the medium term."