LONDON (AFP) — The Bank of England on Thursday kept its key lending rate at 5 percent, a move analysts said was designed to dampen high inflation despite slowing economic growth and a slumping property market.
The decision to hold British rates for the second month in a row, in line with market expectations, came shortly before the European Central Bank similarly left its rate at 4.0 percent in a bid to tame record inflation.
"The Bank of England really had little option but to leave interest rates unchanged at 5.0 percent," said Howard Archer, economist with consultancy Global Insight.
"Despite evidence that the UK's economic slowdown is deepening and rising concerns over the very weak housing market, the Bank of England's hands are currently effectively tied by elevated inflation levels and risks."
British inflation hit 3.0 percent in April after 2.5 percent in March, driven largely by soaring energy and food prices. That marked the fastest acceleration in the 12-month figure since July 2002.
The BoE, whose chief task is to keep annual inflation close to a 2.0-percent target, had warned last month that it could spike as high as 3.6 percent.
Thursday's "no change" rate call came despite news that British house prices plunged 3.8 percent in May for the largest annual drop since April 1993, according to a key survey from home loans provider Halifax.
Halifax, part of British banking group HBOS, said in its latest monthly survey that house prices fell 2.4 percent in May compared with April.
The bank added that cash-strapped consumers were tightening their belts and shunning home purchases in the face of higher fuel and food prices plus higher borrowing costs due to the global squeeze on credit.
Many economists predict that British borrowing costs will now remain at 5.0 percent for the rest of the year as the BoE battles inflation.
"Our new interest rate view is that the Bank rate will remain at 5.0 percent for the rest of this year but will fall to 4.25 percent next. We certainly do not believe that rates will rise," said Investec economist Philip Shaw.
He predicted that borrowing costs would fall in 2009 as inflation recedes and the economy weakens further.
"Next year, we believe that inflation will fall sharply as the worst effects of energy and food price increases abate and as a weak economy bears down on price pressures," Shaw added.
The BoE gave no explanation for its decision on Thursday, as is customary when no change is made to the "repo" rate that it offers commercial banks.
Minutes of the meeting of the monetary policy committee (MPC) will be released on June 18.
At its last meeting in May, the bank had opted against back-to-back interest cuts to stimulate economic growth as inflation remained high amid record oil prices.
Since then, however, oil prices have rocketed even further to above 135 dollars, further stoking inflationary pressures.
Britain's economy, which also faces headwinds from the global credit crunch, grew by just 0.4 percent in the first three months of 2008 in the weakest showing for three years.
- The Bank of England website: http://www.bankofengland.co.uk/index.htm
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