Rates stay at 4.5% but next move is uncertain

The Bank of England yesterday left interest rates steady at 4.5% for the second month running following the quarter-point cut it made in August.

The Bank's monetary policy committee had been expected in the City to leave borrowing costs on hold this month but there is growing speculation that sluggish economic growth and weak consumer spending could persuade the central bank to ease policy again as soon as next month.

The MPC has signalled that with inflation having been pushed above its 2% target by surging oil prices, it is in no mood to cut rates again soon, especially as it expects consumers to start spending again. Oil prices yesterday fell by nearly $2 a barrel to below $61 for US light crude - the lowest level for two months.

Ian McCafferty, chief economist at the CBI, said: "Currently there is a delicate balance between nurturing growth and keeping inflation under control and the MPC's decision not to change the rate reflects this as it steers a course for long-term stability. There are potential risks, with regard to both growth and inflation, which the Bank must remain alert to."

But in the City many analysts think there is little evidence of any recovery in growth and that with unemployment starting to creep up, there is also little sign of inflation in the labour market. A report released yesterday by the Recruitment and Employment Federation, the recruitment agency trade body, suggested there had been the weakest rise in permanent job placements in two years and the slowest wage inflation for 20 months.

The TUC said rates needed to be cut again. "The decision to hold interest rates comes as no surprise, but we expect the MPC to consider another cut before Christmas. The latest figures show that in the year to June, the economy grew by just 1.5%. Manufacturing employment has fallen by 95,000. For both these reasons, interest rates must come down soon," said the union's chief economist Ian Brinkley.

Last week the CBI released a survey showing the weakest retail sales figures in 22 years. Meanwhile new data yesterday showed it is not just shops that are feeling the squeeze. The Society of Motor Manufacturers and Traders reported that car sales were down 3.2% in September compared with the same month last year and 5.2% lower in the first nine months of the year. "The new car market is fiercely competitive this year and manufacturers are fighting hard for every sale" said SMMT chief Christopher McGowan.

Jonathan Loynes of consultancy Capital Economics said rates were headed lower. "We still expect rates to fall to 3.5% next year, with a growing chance that the next cut comes in November."

The National Institute of Economic and Social Research agreed that rates may have to come down again soon. The think tank released its latest monthly estimate of overall gross domestic product growth, suggesting that in the third quarter the economy expanded by only 0.3% from the second, half its long-run average.