Rates expected to be frozen

May 8 2008

Bank of England policymakers are expected to keep interest rates on hold, but pressure is mounting for a back-to-back cut after this week's flurry of disappointing economic news.

Economists are predicting that the Bank's verdict on the cost of borrowing will be a tough decision coming amid a raft of poor economic indicators from the manufacturing, services and housing sectors.

Data earlier this week revealed that growth of activity in the services sector slowed to its lowest level since March 2003 as firms including banks, hotels and restaurants were battered by a combination of rising costs and a downturn in new orders.

Just a day later, figures showed a shock fall in manufacturing output in March, with a 0.5% decline coming as a surprise to experts who had forecast manufacturing production to remain unchanged during the month.

The Monetary Policy Committee (MPC) is already facing calls to slash rates again after last month's quarter point cut to 5% as the property market shows further signs of a downturn.

House price growth turned negative during April for the first time since February 1996, with UK house prices now 0.9% lower than they were in April last year, according to data out last week from Halifax.

David Kern, economic adviser to the British Chambers of Commerce, made a plea to the MPC not to wait before taking further action.

He said: "UK business has so far remained remarkably resilient in the face of worsening threats and if correct policies are adopted, recession can certainly be avoided.

"However, it would be complacent to disregard the dangers facing the economy. A small cut in interest rates, to 4.75%, would alleviate stresses in vulnerable areas of the economy and strengthen business confidence without taking undue risks with inflation."

But economists predict that the Bank may hold off from a move in rates until next month, with inflationary pressures looming large.