Interest rates set to stand still as inflation eases

The Bank of England's monetary policy committee (MPC) is set to leave interest rates unchanged again at its monthly meeting this week.

New statistics have shown an easing of inflationary pressures since the MPC voted 6-3 in favour of leaving rates at 6 per cent last month. Last week the US Federal Reserve also held its rate at 6.5 per cent, which is still its highest level for nine years.

While Bank Governor Eddie George has made no secret of the fact that rates may have to rise if the pound falls sharply, sterling has stabilised in recent weeks after dropping from the heights reached in May. Meanwhile the domestic inflation figure that most concerns the MPC, the index for average earnings, has slowed. This confirms the MPC view that earlier alarmist figures were inflated by one-off wage bonuses.

Stephen Lewis, analyst at Monument Derivatives, said: 'Unfortunately for the hawks, economic data released since the June MPC meeting has militated against their case for tightening credit. Average earnings are running so far below the path that seems to have been assumed in the Bank's May Inflation Report as to call for major adjustments to the forecasts presented therein.'

Average earnings in April showed a drop in the headline rate from 5.7 to 5.1 per cent. Economists at Barclays Capital, David Hillier and Adam Law, say that the underlying growth in earnings, 4.4 per cent, is consistent with the inflation target for the first time in nine months.

Latest official estimates confirm earlier calculations that the economy's growth rate slowed in the first quarter.