Borrowers still have something to smile about

OVERSTRETCHED borrowers will be relieved this week if, as expected, the Bank of England leaves interest rates unchanged at four%.

Six months ago, the City was predicting that by now the rate would have risen - and be on its way to hitting 5.5% by the end of the year.

And as recently as two weeks ago, it was widely believed that the August meeting of the Bank's Monetary Policy Committee would see the rate lifted to 4.25% as the Bank struggled to choke off roaring consumer demand.

But four factors have changed all that:

London share prices dived by more than six% in a fortnight;

Inflation in June fell to one%;

June retail sales figures showed a fall of 0.7%, taking the annual increase down to 4.6%, from 5.5% in May, the weakest figure for 18 months.

Mortgage approvals and credit card spending in June fell to their lowest levels for four months, suggesting a cooling of the housing boom and High Street spending spree.

All this has pushed any potential increase, however small, off the agenda. Indeed, there are suggestions that the next move may actually be down. If this is good news for millions of people with mortgages and credit cards, it is greeted less warmly by the City's economic analysts.

These are the modern-day soothsayers who reap handsome rewards for making detailed forecasts - and when it comes to interest rates, their crystal balls have been highly polished in the past few months. Sad to say, almost all the predictions have proved wildly wrong.

The Thursday get-together of the MPC will complete their humiliation. Again and again, they insisted that the August meeting would see the first increase in the base rate since February 2000.

'The dogs were barking,' one senior City economist admitted ruefully, 'and we woofed along with them.'

August's meeting is just the latest in a catalogue of wrongly called interest rate movements. According to researcher Consensus Economics, the biggest City banks have been woefully adrift in their base-rate forecasts for the best part of a year.

In July 2001, the prediction for the three-month interbank rate - the benchmark that tracks base rate - was 5.2% by September 2001 and 5.5% by this month. In fact, the rate was 4.8% in September 2001 and 4.1% this month.

In October 2001, the consensus for three-month rates in December was 4.4%. The outcome was 3.9%. In May this year, they were looking for 4.4% rates by this month. The outcome, as noted, was just 4.1%.

Their forecasts of what the MPC itself would do have been, if anything, even worse. They started the year predicting a base rate of 4.75% by December 31. Within a few weeks, they had shifted this up to 5.5% by the end of the year.

And now? The consensus is for rates to have inched up by just 0.25% by spring next year, to 4.25%.

In other words, more than a fifth of the predicted level of the base rate has simply disappeared.