Rate freeze wins warm welcome from all sides

The Bank of England left interest rates on hold yesterday, to a chorus of approval from the City, industry and the retail sector.

The monetary policy committee had been widely expected to keep rates at 3.75% after raising borrowing costs by quarter of a point last month.

Although the Bank opted not to play Scrooge in the run-up to Christmas, analysts believe that with the economic outlook improving it is likely to raise rates in the new year.

"The Bank of England's early Christmas present was just what we wanted," said Graeme Leach, chief economist at the Institute of Directors. "The Bank needs to wait until the new year to assess the impact of the previous rate rise.

"However, if the economy looks strong in early 2004 a further half-point rise in interest rates is quite possible in the spring."

The European Central Bank, which sets borrowing costs for the 12-nation single currency zone, also delivered a no-change verdict yesterday.

Although parts of the UK economy are growing strongly, with figures earlier this week showing the service sector expanding at its fastest pace for six years, there are signs that growth in the housing market is moderating, the manufacturing recovery is still seen as fragile and consumer confidence is less buoyant in the pre-Christmas period.

"We are looking at very fragile consumer confidence. Consumers are becoming increasingly nervous about the strength of the economy after last month's [rate] rise," said a spokesman for the British Retail Consortium. "We certainly felt there was no rush to press the consumer further."

The BRC released shop price inflation figures yesterday showing a robust 3.1% rise last month compared with the same period a year before, but the spokesman said much of the impetus came from higher food prices due to the severe weather this summer.

Industry was equally relieved. Ian McCafferty, chief economist at the CBI, said the Bank needed to wait and see how much shoppers spent on Christmas and the new year sales before deciding on the next move in rates.

The TUC was in full agreement: "It is premature to talk about more rate rises until we can see a real manufacturing recovery is under way."