Relief as rates are held

The Bank of England spared businesses and homeowners from dearer borrowing yesterday, leaving base rates on hold at 5.25%. Industry and union leaders greeted the news with relief but city analysts said signs of stronger economic growth meant further rate rises were almost inevitable before the end of the year.

"There is a very strong likelihood they will raise rates next month," said Ciaran Barr, UK economist at Deutsche Bank. "We would be very, very surprised if the Bank did not raise rates again this year."

Financial markets reacted with euphoria yesterday with the FTSE 100 index gaining nearly 120 points before closing at 6,200.4, 102.9 up on the day. The pound shed nearly a cent against the US dollar on the announcement, before recovering most of its losses to close in London at $1.6528.

The nine-member monetary policy committee gave no reason for its decision, which
follows last month's quarter point increase.

John Monks, the TUC general secretary, welcomed the decision but said: "City speculation will keep the pound too high for exports to recover," unless the MPC made it clear it was not planning further rises.

The CBI also said the Bank had made the right decision. "With sterling so strong already, exporters will be particularly relieved as they fight for a share of the upturn in global markets," said Kate Barker, the CBI's chief economic adviser. "Most data point to a steady recovery rather than overheating. Price rises are not possible in many sectors because of the strength of competition."

She said there was no room for the government to go on a tax cutting and public
spending binge before the next election. "Significantly relaxing fiscal policy now would put at risk next year's prospect of robust growth combined with low inflation. It would prompt even higher rates and exacerbate the two-speed economy."

Most City analysts agreed yesterday's decision merely postponed an inevitable increase in rates. Strong growth in manufacturing in August is likely to boost economic output in the third quarter by more than the Bank has been forecasting, and inflation hawks on the MPC are watching the housing market for signs of overheating.

"We are pencilling a rate rise in November, ahead of its quarterly inflation report," said Nick Stamenkovic, senior bond strategist at IDEAglobal.com.

But another rise in rates would be an unpopular move with price pressures running at a 36-year low. Inflation appears to be dead in the high street, according to figures released today by the British Retail Consortium. Shops facing stiff competition are slashing prices of commonly bought items, pushing the BRC's price index down by 0.5% between August and September.
The index has fallen 1.4% in the two years since it began the survey. "The fall in prices over the latest month and compared with a year earlier shows how competitive the retail sector is," said Ann Grain, the BRC's director general.