Interest rates stay unchanged for third month

The Bank of England today left interest rates unchanged at 4.5% for the third consecutive month amid expectations that inflation will remain above target for a while.

The decision was widely expected given the recent economic data and statements from Bank officials.

There have been signs that consumer spending may have passed its low point, despite a litany of complaints from retailers. Meanwhile, the housing market has picked up in recent months, with prices firming up accordingly.

Earlier this month, the Nationwide building society reported that house prices rose 1.3% in October, although Halifax said prices did not move at all in October. Nevertheless house prices have stabilised in the past few months.

In any case, the Bank's governor, Mervyn King, has made it clear that the Bank's job is to focus on inflation rather than high street sales or the housing market.

Inflation hit 2.5% in September, staying above the Bank's 2% target for the third month in a row. Concerns remain about inflationary pressures from high oil prices.

Minutes of the October rate meeting showed that the Bank's monetary policy committee did not even discuss a rate cut.

The minutes, signalling an increasingly hawkish line on inflation, said that if second-round effects from higher energy prices took hold, "the committee would need to run a tighter monetary policy than would otherwise have been the case."

Even Richard Lambert, perceived as one of the most dovish MPC members, recently said his decision to cut rates in August was the toughest one he has had to make, indicating that he is unlikely to vote for another cut any time soon.

Analysts are divided as to whether the next change in interest rate policy will be up or down.

Alan Clarke, UK economist at BNP Paribas, believes it will be a move towards higher borrowing costs.

"As the data continue to firm and upside risks to inflation build, we believe the MPC will adjust interest rates higher in the New Year," he told Reuters.

Others are looking forward to a cut early next year as weaker growth eases inflationary pressures.

"We still expect the next move in interest rates to be down, but the Bank of England now seems unlikely to act before February," said Howard Archer of Global Insight. "Despite the recent signs of modest improvement, we believe that consumer spending will remain relatively soft for some time to come, thereby contributing to further below-trend growth."

This month's meeting coincides with the Bank's key quarterly inflation report, due to be published next week. That should give some inkling as to where the Bank is heading.