07/11/2002

Bank of England holds UK interest rate at 4%

The Bank of England has held the main UK interest rate at 4% for the twelfth consecutive month.

This is despite a larger than anticipated cut by the US Federal Reserve. Leading economists were split on whether or not interest rates would or should be dropped. Many of those in favour of an interest rate cut were looking to the US market for a drop which might have heralded a cut in the UK rate.

However, despite the US Federal Reserve's decision to cut interest rate by half a percentage point, taking the interest rate to 1.25% in a bid to firm up a weak recovery in the US economy, the UK's Monetary Policy Committee (MPC) were unimpressed with the arguments for a rate cut.

Next week the MPC is expected to publish projections on inflation over the next two years, and the decision to hold the interest rate at 4% is being interpreted as an indication that the MPC think that inflation may rise to near the 2.5% target inside the two-year period.

However, with the manufacturing sector continuing to be hit by the relatively high UK interest rate, the Engineering Employers Federation called for a UK rate cut. Opposed to this the retail sector indicates that there is no pressing need to cut rates as the twin-track UK economy displays healthy retail sales figures for October.

One of the main fears about an interest rate cut is that this may seriously overheat the runaway property sector. House price inflation recently topped 24% to reach its highest level since the 1980's boom, which resulted in negative equity problems for many when prices slumped in a housing market rationalisation.

(SP)

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