BoE likely to hold interest rates until fog clears
Friday, 11 July 2008
LONDON, July 10 (Reuters): The Bank of England (BoE) is expected to hold interest rates at 5.0 per cent Thursday and will probably sit tight until it has a better idea of which is the greater evil, surging inflation or slowing economic growth.
Inflation is running at its fastest pace since the BoE won the power to set British interest rates in 1997, a development that would embarrass any inflation-targetting central bank.
The European Central Bank (ECB) has already raised borrowing costs to counter the global inflation threat and British policymakers, who are required to keep inflation at 2 per cent, say they won't be surprised if the UK measure spikes above 4 per cent this year.
In any other circumstances, UK rates would be going up.
But the economic news has become consistently doom laden, raising fears of the first British recession since the early 1990s and persuading all 72 analysts polled by the news agency that borrowing costs will stay on hold this week.
The UK housing market is spiraling downwards, stock markets are tumbling, firms are laying off thousands of workers and surveys already indicate the economy is shrinking.
Britain's biggest mortgage lender, Halifax, said house prices fell 2 per cent in June alone, putting them nearly 10 per cent down from the peak hit last August. Prices are now at the same level they were in the middle of 2006.
Barratt Developments joined other builders in cutting jobs-nearly a fifth of its workforce-to help it steer a safe passage through the housing market downturn.
"The UK is heading for a toxic mix whereby CPI inflation heads up to about 5 per cent in the next two to three quarters while the economy skirts with-or may well fall into-recession," said Michael Saunders, an economist at Citi.
Business groups have turned up the volume on their routine calls for the BoE's monetary policy committee to lower interest rates, and have found an ally in the trade union movement.
Inflation is running at its fastest pace since the BoE won the power to set British interest rates in 1997, a development that would embarrass any inflation-targetting central bank.
The European Central Bank (ECB) has already raised borrowing costs to counter the global inflation threat and British policymakers, who are required to keep inflation at 2 per cent, say they won't be surprised if the UK measure spikes above 4 per cent this year.
In any other circumstances, UK rates would be going up.
But the economic news has become consistently doom laden, raising fears of the first British recession since the early 1990s and persuading all 72 analysts polled by the news agency that borrowing costs will stay on hold this week.
The UK housing market is spiraling downwards, stock markets are tumbling, firms are laying off thousands of workers and surveys already indicate the economy is shrinking.
Britain's biggest mortgage lender, Halifax, said house prices fell 2 per cent in June alone, putting them nearly 10 per cent down from the peak hit last August. Prices are now at the same level they were in the middle of 2006.
Barratt Developments joined other builders in cutting jobs-nearly a fifth of its workforce-to help it steer a safe passage through the housing market downturn.
"The UK is heading for a toxic mix whereby CPI inflation heads up to about 5 per cent in the next two to three quarters while the economy skirts with-or may well fall into-recession," said Michael Saunders, an economist at Citi.
Business groups have turned up the volume on their routine calls for the BoE's monetary policy committee to lower interest rates, and have found an ally in the trade union movement.