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Bank of England kick-starts 2006 with rate freeze

The Bank held its key interest rate steady at 4.50 per cent for the fifth month in a row amid signs of a pick-up in the British economy.

india Updated: Jan 13, 2006 19:00 IST
Agence France-Presse
Agence France-Presse

The Bank of England on Thursday held its key interest rate steady at 4.50 per cent for the fifth month in a row amid signs of a pick-up in the British economy.

Sterling held onto Thursday's gains following the BoE's latest monthly freeze, which had been widely predicted by economists.

Shortly after the BoE decision, the European Central Bank held its key interest rates steady at 2.25 percent.

As is customary when no change is made to the BoE's "repo" rate -- the rate of interest at which it lends to commercial banks -- its nine-member Monetary Policy Committee gave no explanation for the decision.

Market watchers must wait until January 25 for official comment following publication of minutes from the two-day MPC meeting.

"December survey evidence showing robust service sector activity, stronger retail sales and firmer house prices has temporarily at least alleviated some concern over the economy's softness and eased pressure on the MPC for an imminent cut in interest rates," said Howard Archer, chief Britain economist at Global Insight.

Ahead of the Bank's latest rate call, data published Thursday revealed that Britain's manufacturing output rebounded in November from October's heavy decline.

The office for National Statistics revealed that manufacturing output, which accounts for about 17 per cent of overall economic activity, increased by a seasonally-adjusted 0.4-percent in November from the previous month's 0.8-percent drop.

Investec Securities analyst Philip Shaw argued that the door remained open open for a cut in rates over the next two months.

He said it was "quite feasible" that rates would fall in February if the Bank's new economic forecasts suggested that British inflation would undershoot the government's 2.0-percent target.

"Although inflation is currently a touch above target at 2.1 percent, much of this is explained by the strength of energy prices. Excluding these, and other volatile items, the core index is at 1.5 percent," he noted.

After unanimously voting to keep rates steady during September, October and November, the Bank's policymakers voted 8-1 to keep the cost of borrowing on hold last month.

MPC member Stephen Nickell broke ranks by surprisingly voting for a reduction to 4.25 percent, following the Bank's quarter of a percentage point cut in August from 4.75 percent.

He had argued that inflation was likely to stand below the Bank's 2.0-percent target in the medium term because of factors including subdued wage growth and trade.

While Nickell called for a rate cut last month, the MPC's other eight members had argued for a wait-and-see approach, saying it was too early to conclude that there would be no spike in wage growth.

Workers in Britain traditionally receive annual pay increases in January.

British interest rates had stood at 4.75 percent between August 2004 and July 2005, before a quarter-point cut last August owing to subdued economic growth.

On Thursday, the European Central Bank held eurozone borrowing costs steady at its first rate-setting meeting of 2006, after its quarter-point hike in December -- the first increase in more than five years.

The US Federal Reserve had lifted its benchmark rate by a quarter point to 4.25 percent last December, the 13th successive rise. However, economists expect the Fed to soon end its policy of rate-tightening.

First Published: Jan 13, 2006 19:00 IST