Bank Set to Hold Interest Rates Tomorrow
May 7th, 2008 by 
Guy
UK mortgage interest rates are expected to be held at 5%, despite a lot of worries about the economy.
The Bank of England’s Monetary Policy Committee (MPC) have held a two day meeting and will announce their decision on Thursday.
Last month’s rate cut, from 5.25% to 5% meant that the MPC had been expected to hold off on any more rate cuts for now.
This week however there had been a lot of negative manufacturing and service sector data which had led some to think a further cut is more likely.
The pound fell on speculation that Bank of England may cut rates this month, though most analysts still expect that the next cut will come in June.
The Bank of England is normally reluctant to have back-to-back rate cuts, said BNP Paribas analyst Alan Clarke.
“One reason for that is the fear that it will cause the market to extrapolate the move and price in even deeper cuts,” he added.
However, Global Insight’s chief UK economist, Howard Archer, said that another rate cut in May was a “distinct possibility”.
“The recent stream of weaker data suggests that the UK economic downturn is deepening and widening,” he added.
And Paul Dales of Capital Economics said that the decision was “looking a closer call than a few days ago”.
Office for National Statistics survey showed that manufacturing fell by 0.5% in March, the biggest rate of decline in six months.
However, it rose by 0.3% in the first three months of 2008 compared with the fourth quarter of 2007.
The wider measure of industrial production also fell 0.5% in March - its quickest rate of decline in over a year.
The figures follow this week from the Chartered Institute for Purchasing and Supply which suggested that the UK services sector grew at its slowest rate in nearly half a decade in April as costs rose.
The MPC’s April rate cut was the third since Christmas last year, as the credit crunch continued to unsettle the UK housing market.
The crisis which has made funding mortgages more expensive for banks and building societies, meant that not all lenders passed on the reduction to its borrowers, despite government pleas for them to do so.
Figures from Moneyfacts suggest that about a quarter of UK lenders have not reduced their SVR in the past month.
Last month’s decision to cut rates by a quarter of a percentage point was not unanimous, with one MPC member calling for a 50-basis-point reduction.
And two policymakers said that rates should be held at 5.25% to try to control inflation, which is under pressure from the weak pound and rising energy costs.
The most recent available data showed that Consumer Prices Index inflation was 2.5% in March.
However, according to the British Retail Consortium’s shop price index, food prices rose by 4.7% last month compared with a year ago.
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