Bank set to keep base rate at 5% as inflation continues to rise

Homeowners are likely to get little respite from high borrowing costs this week, with City economists predicting that the Bank of England will keep interest rates on hold when its rate-setting Monetary Policy Committee meets on Thursday.

The committee is expected to keep rates at 5 per cent despite calls for cuts to revive the economy, which many think teeters on the edge of recession.

Michael Taylor, senior economist at Lombard Street Research, said he expected rates to be kept on hold at 5 per cent for the rest of the year, constrained by rising inflation. It was likely, Mr Taylor said, that inflation would rise above 3 per cent in the next month, forcing the Bank's Governor, Mervyn King, to write a letter of explanation to the Chancellor, Alistair Darling.

Mr King has had to write only one such letter in the past.

"If the Bank of England starts cutting interest rates now, we will end up with a much worse inflation problem in the next few years," said Mr Taylor. "The committee has to remember the long-term picture."

The City will find out whether the 3 per cent level has been breached on 17 June, when the latest consumer price index is published.

In a poll of 20 economists by the financial news provider Bloomberg, 80 per cent said they believed the committee would hold rates at 5 per cent this week. The Bank has cut interest rates three times in the wake of the credit crunch, but kept them on hold at its last meeting because of fears of inflation, which has crept to 3 per cent – 1 per cent higher than its target.

Thursday's decision on rates will come just days after conflicting data showing both the largest monthly fall in house prices in 17 years and the fastest rise in retail prices in 16 years.

The Nationwide building society reported that house prices fell by 2.5 per cent in May – the biggest year-on-year drop since December 1992 – while the employers' organisation the CBI said that 56 per cent of retailers had reported higher selling prices in the past three months.

The chief executive of HSBC bank, Michael Geoghegan, last week called on the Bank of England to raise interest rates, saying: "Inflation is a long-term problem because there is no long-term will to solve it."

(taken from: here)