No change: for this month, at least

The Bank of England left interest rates on hold today but the sense of relief felt by businesses and homeowners is likely to be temporary.

The "no change" decision was widely expected after the bank's forecast last month that inflation was on target over the next two years.

However, with consumer spending continuing to grow strongly and the labour market tightening, borrowing costs are unlikely to have peaked at 6%.

After raising rates four times in the past six months, the Bank's monetary policy committee has paused for breath for fear of further increasing the value of sterling.

The strong pound is making it hard for manufacturing to compete in international markets and exposing them to extra competition from cheaper imports, resulting in widespread job losses and a widening trade deficit.

But unless the booming service sector shows decisive signs of slowing down, the Bank is likely to raise rates again soon to prevent the economy overheating irrespective of the state of manufacturing.

How much further rates will rise is the key question.

Some City analysts predict that they will go above 7%; others forecast just one more quarter point increase.

The eventually peak of borrowing costs will be determined by the economic data over the coming months.

In particular, the Bank has indicated that it is keeping a particularly watchful eye on the labour market.

Figures released last month showed average earnings growth accelerating to 5.5% a year in January, a worrying sign if the figures are reliable.

It suggests falling unemployment is allowing workers to bargain for higher wages not justified by productivity gains, forcing firms to raise prices to protect their profit margins.

Some members of the bank's monetary policy committee think the figures have been artifically boosted by one-off millennium bonuses.

They are therefore prepared to wait for a few months to see if earnings growth slows.

If earnings are still accelerating in a few months time, however, they may well change their minds.

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