Interest rates remain unchanged

The Bank of England today left interest rates at 4.5% for the ninth month running, amid signs of a recovery in the UK manufacturing sector and suggestions that the next move may be upwards.

Official data out last week showed that manufacturing expanded by 0.5% between January and March, contributing to output from production industries lifting by 0.7% overall to hit its highest level since the third quarter of 1999.

Further good news was provided by the Chartered Institute of Purchasing & Supply (CIPS), which this week found that activity in the manufacturing sector was at its highest for 17 months.

Since it cut rates in August last year the Bank's Monetary Policy Committee has been in wait-and-see mode, closely monitoring the affects of oil and property price rises on the economy.

Last month the committee voted 7-1 to leave rates unchanged with only Stephen Nickell, who is set to leave the committee this month, voting for a cut. Other members backed no change because inflation was likely to remain close to the Bank's 2% target.

Tamara Henderson, of Action Economics, said the outlook for inflation was the immediate "wild card" for policymakers as the cost of crude oil was now comfortably above US$70 a barrel compared with US$58 in February.

She said: "As long as inflation expectations remain consistent with price stability, we expect the Bank of England to leave monetary policy unchanged.

"Allowing the Bank to remain patient is the recent dip in inflation below the 2% threshold and continued softness in consumer spending."

But the likelihood now was that rates would go up - probably before the end of this year - rather than down, she said.

Howard Archer, chief UK economist at consultancy Global Insight agreed, saying that string house price growth recorded by Halifax and strong lending figures from the Bank of England suggested the MPC would have to think carefully about trimming rates.

"Indeed, the data are likely to boost belief that the next move in interest rates is up," he added.

Their expectations for higher borrowing costs chime with those of the National Institute of Economic and Social Research (NIESR), which has called for rates to go up because of the risk of higher inflation.