Interest rates stay on hold

THE Bank of England kept rates on hold at 4.75% today. It is the fifth month in a row that the Bank's monetary policy committee has frozen the cost of borrowing.

Signs of a cooling property market, and a slowdown in High Street spending, appeared to be enough to convince the committee to reject calls from some economists to hike rates.

Inflation has gathered pace in recent months, with the annual consumer prices index rate stepping up from 1.2% to 1.5% between October and November, increasing pressure for a rate increase. The MPC's Government-set target is to keep inflation below 2% for two years ahead.

Estate agents and retailers, however, had pleaded for a cut in rates. Earlier this week, figures from the British Retail Consortium showed Christmas trading was a washout - and a handful of store chains, such as M&S, Woolworths and Morrisons, have delivered poor trading statements in the past week.

Just an hour before the Bank's midday announcement, the BRC released figures showing High Street inflation reached a record low in December. Its shop price index fell to -1.41% from -0.94% in November. It blamed 'numerous price promotions', especially on big-ticket items 'where demand has been hit by consumer caution in the face of interest rate rises and the slowing housing market'.

Gloom has also hit the property market with most house price studies continuing to point to a slowdown. The most recent, published by lender Halifax last week, showed a 0.1% rise in the final three months of 2004, the smallest quarterly gain in five years.

Economists remain divided on the next move for rates. Steven Andrew, economist at fund manager F&C said: 'While it is clear that UK consumers are becoming more cautious with their money and spending growth is declining accordingly, calls for the Bank to cut rates are well wide of the mark.' He says that with inflation and unemployment so low, the UK economy will remain healthy in 2005, easing the need for rate cuts.

However, the MPC faces a situation where a rate cut may be needed to stave off a slump in house prices and consumer spending. On the other hand, pressure from rising prices points to rates increases.

Today's decision to freeze rates will be welcomed by mortgage borrowers who have felt the pressure of five rate rises since rates hit a low of 3.5% in 2003.

The increases have added £851.10 a year to the annual cost of a £100,000 typical 25-year repayment mortgage. An extra 0.25 percentage point increase would add a further £176 a year.

Many mortgage lenders have slashed the cost of their one and two-year fixed-rate deals in recent weeks in anticpation of base rate cuts in 2005.Chelsea and Portman building societies cut their two-year rates before Christmas. Rivals Yorkshire and Skipton have improved the value of their fixed-rate deals in recent weeks.