Interest rates on hold

The Bank of England today held interest rates steady for the second month running amid growing evidence of a pick-up in economic activity.

The Bank's monetary policy committee left the cost of borrowing at a 48-year low of 3.5% as widely expected.

All 45 analysts polled by Reuters last week had predicted that rates would stay unchanged.

The MPC last cut rates in July, when Mervyn King replaced Sir Edward George as governor of the Bank.

That decision followed weak growth in the first half of the year, but recent economic data point to more vigorous economic activity for the rest of the year.

Last month, the MPC unanimously decided to keep rates unchanged and there was even discussion about increasing the cost of borrowing. The Bank has expressed concern at the build-up of household debt to record levels. Moreover, house prices have resumed their climb after flattening out during the Gulf war.

Last week, MPC member Paul Tucker described the outlook for monetary policy as "finely poised" and warned consumers to brace themselves for higher borrowing costs in the future.

Analysts believe that the next move on interest rates will be up; the only question is when. Some believe that the Bank will raise the cost of borrowing this year, while others think early next year is more likely.

Data published in recent days indicate that growth will accelerate in the second half of the year. Yesterday, a survey from the Chartered Institute of Purchasing and Supply showed that the service sector, which accounts for the lion's share of gross domestic product, grew at its fastest pace since January 2001.

Other data showed that the long-suffering manufacturing sector may be finally emerging from the doldrums. Surveys this week showed Britain's construction industry expanding at its fastest pace in 16 months in August, while the engineering sector reported its first quarterly rise in output in over two years.