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Bank of England to keep rates on hold to combat inflation PDF Print E-mail
Friday, 06 June 2008

AFP, LONDON - The Bank of England was expected to keep interest rates at 5.0 percent on Thursday to combat inflation driven by soaring oil and food prices despite concerns over slowing growth and the housing market, analysts said.

Economists forecast that the British central bank would make no change to its key "repo" rate -- at which it lends cash to commercial banks -- after a two-day meeting that begins on Wednesday.

"It appears to be a stone-dead certainty that interest rates will remain at 5.0 percent even though the economy continues to weaken and house prices are currently heading south at an increasing rate," said economist Howard Archer at the Global Insight consultancy in London.

"This reflects the fact that inflation pressures and risks have increased appreciably despite the ongoing slowdown in growth."

Meanwhile on Thursday, the European Central Bank was also expected to hold eurozone borrowing costs at 4.0 percent amid record eurozone inflation and signs of resilient economic growth.

The Bank of England's nine-strong monetary policy committee (MPC) kept rates at 5.0 percent last month, ruling out back-to-back cuts to help stimulate economic growth as inflation remained high amid record-high oil prices.

Since the May rate decision, however, oil prices have rocketed even higher to above 135 dollars, sparking international concern and stoking inflationary pressures.

"A cut in rates from the MPC on Thursday still looks off the cards on concerns over inflation and we expect the committee to leave the Bank rate on hold at 5.0 percent," said Investec economist Philip Shaw.

The BoE, whose chief task is to keep annual inflation close to a 2.0-percent target, warned last month that it could spike as high as 3.6 percent.

Inflation in April hit 3.0 percent after 2.5 percent in March, marking the fastest acceleration in the 12-month figure since July 2002, driven largely by soaring domestic energy and food prices.

"The jump in inflation in April has taken further near-term interest rate cuts off the agenda," said Capital Economics analyst Jonathan Loynes.

"Indeed, the MPC is unlikely to want to cut rates while inflation is above three percent and rising towards four percent, as (inflation) is likely to do as higher petrol and utility prices rise further."

In April, the BoE cut rates by a quarter-point as it sought to balance the risks of rising near-term inflation and an economic slowdown resulting from the global credit crunch.

Britain's economy grew 0.4 percent in the first quarter compared with the final three months of 2007, the weakest showing in three years.

In line with most major economies, Britain faces slower economic growth this year because of the ongoing global credit crunch that erupted last year and stemmed from the collapse of the US subprime or high-risk home loan sector.

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