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Bank of England leaves rates unchanged

The Bank of England held British interest rates steady at 4.0 percent for the second month running on Thursday, but analysts said borrowing costs are highly likely to rise next month.
/ Source: Reuters

The Bank of England held British interest rates steady at 4.0 percent for the second month running on Thursday, but analysts said borrowing costs are highly likely to rise next month.

The BoE made no statement to explain its thinking after a meeting that put markets on a knife-edge over whether rates would go up to cool soaring debt levels and booming house prices.

"I wouldn't be surprised if the decision was a close vote," said George Buckley, economist at Deutsche Bank. "It just means they'll put it off until May."

Financial markets reacted strongly to the decision, with sterling off half a cent against the dollar and UK interest rate futures up sharply, as traders reckoned the BoE was sticking to its approach of raising rates gradually.

Futures markets are pricing in borrowing costs rising by a full percentage point by the end of the year and a half-point by the end of June, even though inflation remains well below the BoE's 2.0 percent target.

The BoE has already raised interest rates twice since November by a total of 50 basis points in response to a consumer boom.

Sterling trumps consumer debt
The strong pound was probably the key factor in prompting policymakers to put off another rate rise, as it cuts exporters' profit margins and has a dampening effect on inflation.

"Business is pleased the Bank has not rushed into a decision to raise interest rates. The manufacturing recovery is fragile, inflation prospects are well under control and the previous two rate rises have not fully fed through," said Ian McCafferty, chief economic adviser at the Confederation of British Industry.

Sterling has been trading near one-year highs on a trade-weighted basis.

Concerns that an interest rate hike would prompt the pound to gain more ground and further damage competitiveness was no doubt a focus at the two-day meeting of the BoE's Monetary Policy Committee, as it has been in the recent past.

A few months ago manufacturers seemed on a solid path to recovery but figures released this week showed that manufacturing output fell sharply in February.

But some of the nine MPC members probably voted for a hike this month, having already expressed concerns about rising consumer debt levels and rapid house prices rises.

"It's very difficult at this stage to say much about the balance of power between the doves and the hawks on the Committee," said Alan Castle, economist at Lehman Brothers. "We suspect a number of members would have voted for a rate hike."

After years of house price inflation of 20 percent or more, the latest figures from the Halifax, the nation's largest mortgage lender, showed price rises accelerating again in March toward that rate after a pause late last year.

Although the BoE targets overall consumer inflation, not asset prices, MPC members have repeatedly warned that current levels of house price inflation are unsustainable.

Some have warned that the risk of a sharp correction in housing rather than an easing to zero inflation goes up the longer such rates of inflation are sustained.