The Bank of England has again defied calls for a cut in the cost of borrowing by leaving interest rates unchanged for the sixth month running.
The Bank’s Monetary Policy Committee (MPC) has keep borrowing costs on hold at 4.5 per cent since August last year, despite five consecutive quarters of below-trend growth, because of fears that soaring fuel costs might trigger an inflationary spiral with wages and prices both rising.
Analysts said the MPC would have been encouraged to continue its “wait and see” policy by the modest improvement in growth in the fourth quarter of 2005 and the fact that earnings data from the all-important January pay round is not available until March.
Earlier this week retailers called on the Bank to cut rates after the latest snapshot of high street activity showed the Christmas and new year surge in spending had petered out.
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Kevin Hawkins, the director-general of the British Retail Consortium, said: “After the pre-Christmas upturn, we are now back to the reality of a tough, discount-driven retail market. The message from every sector of our industry is the same. The squeeze on consumer spending continues unabated. The economy badly needs a cut in interest rates.”
But the Bank’s decision to keep borrowing cost unchanged was widely-expected in the City and backed by The Times Shadow Monetary Policy Committee, which voted 8-1 to keep rates on hold. Only Sushil Wadhwani, a former member of the Bank’s rate-setting committee, called for a cut.
The remainder of the panel, including Andrew Sentance, chief economist of British Airways, agreed that there was not strong enough evidence for now to justify a rate cut — though they did not exclude the possibility that one might yet be required.
Ian McCafferty, the CBI chief economic advisor, also welcomed the Bank’s decision but called on the MPC to remain vigilant to weakness in the economy.
“With the full impact on inflation of higher energy costs and recent wage settlements yet to emerge, the Bank has chosen to follow a steady course,” he said. “This is particularly understandable given current mixed economic signals.
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“The slightly less negative recent news from the housing and retail sectors contrasts with increasing pressures on manufacturers from the high cost of fuel and materials. The MPC should stay alert to further weaknesses in the economy and must remain on standby to cut rates over the coming months.”
At January’s rate-setting meeting, Steve Nickell was the only member of the MPC to vote for a cut.
Mr Nickell concluded that there was a case for an immediate cut given the modest degree of spare capacity in the economy. He felt that growth in Government spending would probably slow next year and that the Bank’s projections for investment and trade were “too optimistic”.
But he was outvoted by the other eight members of the committee, including Governor Mervyn King, who felt that that higher energy costs, import prices and the exchange rate represented near-term risks that might push up the rate of inflation.
Economists are split on when and whether the Bank will move to cut borrowing costs this year. Most believe interest rates have further to fall, with a quarter point reduction coming in the second quarter as economic growth disappoints and inflationary pressures ease in the wake of subdued activity levels and a sustained decline in oil prices.
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“If the recent trends of muted wage inflation, deteriorating employment and industrial recession persist, we would expect the current downside monetary policy bias to translate into a cut in base rates,”Ross Walker, an economist at the Royal Bank of Scotland, said. “Our forecast is for one more quarter point reduction, in May,” he added.
But other economists think the Bank will leave rates on hold for the rest of the year as economic growth comes back towards the trend rate.