Interest rates held steady at 5%

UK interest rates have been kept steady at 5% by the bank of England after the cost of borrowing reached a five-year high following two hikes in the last four months. The impact that the two rate raises had on inflation was considered by the bank and thus the rates were kept in line with the expectations.

The recent Inflation Report suggested that there was little need for the bank to raise UK base rates.

"Today's decision was no surprise but people should not be fooled into thinking interest rates have definitely peaked," said Graeme Leach, chief economist at the Institute of Directors. "It is still a 50:50 call as to whether interest rates go up again in the New Year."

Another reason for the Bank to hold rates at their current level was the recent strengthening of the pound against the dollar. The pound has reached close to $2, a 14-year high.

The Bank's decision was described as predictable by Manufacturers' organization the EEF which held that UK rates should be kept at 5% into the New Year. "The last two increases have bought the Bank some time which it should use to assess the direction of the economy in the New Year," said EEF chief economist Steve Radley. "In particular, we have yet to see the knock-on effects of a slowdown in the United States."

With the housing market and services sector continuously accelerating and acts of manufacturing and consumer spending slowing down, the economy is giving mixed signals.

According to official figures published last month the U.K. consumer price inflation is running above the Bank's 2 per cent target at 2.4 per cent. However, Chancellor Gordon Brown predicted that the inflation will be at its 2 per cent target by the middle of next year and remain there in 2008.

"There is clear weakness in manufacturing and a murky outlook for retail sales which may make the Bank think twice before raising rates again," said Brian Hilliard, chief economist at Societe Generale.

The growing divisions in the policy committee were recently highlighted by recent comments from the rate-setters of the bank. However, the Bank seems to be optimistic on the growth outlook as it predicted the economy to expand 3 per cent next year.