Interest rates: the Bank postpones the inevitable

Of all their recent decisions on interest rates, this was probably the one which kept the members of the Bank of England's monetary policy committee tossing and turning in their beds last night. Which ever way they jumped - upping rates to keep inflation under control as is their mandate from the government, or keeping rates on hold to ease some of the pressure on sterling - they were bound to be come under fire.

The Bank has decided - as widely expected - to keep interest rates on stable at 6%. But they will face criticism today for bowing to industry concern about the pound's strength rather than keeping their eye on their main target: the gathering speed of the economy which some analysts fear will spark renewed price pressures.

The numbers suggest the Bank has won its battle against inflation. The underlying measure of how fast retail prices are growing has been below the Bank's 2.5% target for nearly a year. Britain now has the lowest inflation rate in the European Union - a remarkable achievement given the UK's history of period of rampant price acceleration.

But many economists believe that after recovering from last year's stagnation, the economy is now growing unsustainably fast and that price pressures are bound to re-emerge.

Having raised rates four times since last September the Bank has been dismayed to see that there have been few signs of a slowdown. The economy grew by 3% between the last quarter of 1998 and the same point in 1999.

Most people would see that as a cause for celebration. But economics is not called the dismal science for nothing. For the nine members of the monetary policy committee, that's a sign that demand is outstripping the economy's capacity to supply goods and services.

Luckily for the Bank, the extraordinary rise of sterling against other world currencies has kept price pressures in the domestic economy under control - so far. The pound's strength has made imported goods and raw materials cheaper. But while consumers benefit from lower prices on the high street, manufacturers feel the pinch. It is harder for them to sell their goods overseas because they are more expensive, while at home they face competition from cheap foreign products.

This month, the Bank appears to have gone for a wait-and-see approach. Since it last met, a month ago, the pound has remained at its record levels against the euro, while there are some signs in forward looking indicators that some of the fizz may be going out of the economy. House prices, blamed for fuelling a consumer spending spree in the South East, have fallen for the past two months. However, the MPC may be simply postponing the inevitable higher interest rates. Next month they publish their quarterly assessment of the prospects for inflation. If Threadneedle Street's number crunchers believe price pressures are rising, so too will the cost of borrowing.