MPC set to keep rates on hold

AFTER lifting interest rates five times since last November, the Bank of England's monetary policy committee took another breather last month, holding the cost of borrowing at 4.75%. It was a widely tipped decision amid signs that the housing boom has finally hit the buffers and the economy is slowing.

Today, the MPC kicks off its latest two-day meeting. Here are the indicators it will scrutinise before announcing its verdict at midday tomorrow.

House prices

THERE is little doubt the long-running housing boom is over, but uncertainty remains about where property prices are heading. Nationwide reported a 0.4% fall in the average price in October - the first drop in three years. The building society is optimistic the market is on course for a soft landing but others warn it could be about to crash. David Miles, chief UK economist at Morgan Stanley, said a price fall of between 20% and 25% could not be ruled out.

High Street spending

AN unexpected surge in September cast doubt on claims that consumers are feeling the pinch from higher borrowing costs. Retail sales leapt 1% - the biggest rise since January - as shoppers splashed out on mobile phones, carpets and sportswear. However, surveys have painted a much more downbeat picture. The CBI insists retailers are facing the toughest trading conditions for 18 months.

Growth

A TRIPLE whammy of sluggish global markets, rising interest rates and sky-high oil prices is being blamed for putting the brakes on the economy's growth. Gross domestic product - a measure of overall economic activity - expanded a disappointing 0.4% in the third quarter of the year, a sharp slowdown from the previous three months' 0.9% growth and the slowest pace of expansion since the run-up to the Iraq war.

Manufacturing

GLOOM in the sector is deepening. Latest official data showed factory output slumped 0.8% in August, the biggest fall in nearly two years and the third monthly decline in a row. Industry surveys show confidence crumbling. The CBI reported that it has fallen to its weakest since the middle of last year. Not only are manufacturers facing thinner orders books, they are also having to cope with surging raw material costs.

Inflation

CHEAPER air fares, food and mobile phone charges pushed inflation down to just 1.1% in September, leaving it perilously close to the threshold at which Bank Governor Mervyn King would have to write a letter to the Chancellor explaining why it has fallen so far below the 2% target. Inflation has been below target every month since May 1998 but economists believe it has now troughed. King admitted the inflation outlook is uncertain.

Sterling

THE pound could turn out to be the spanner in the works for hopes that rates are at or near their peak. Since the MPC last met, it has slipped to nine-month lows against the euro, falling about 4% on its trade-weighted index over the past three months. Disappointing data and the growing perception rates will not rise much more are responsible. A weaker sterling is inflationary because it makes imports more expensive, raising the possibility of an offsetting rate rise.

MPC comments

KING has been at pains to PLAY DOWN speculation that rates have peaked. In a speech at the Eden Project in Cornwall, he said it was 'no time for complacency or hubris' over inflation, adding that the economy's 'softer patch' must be weighed against a weaker pound and strong spending. The minutes of the October meeting showed the MPC did not discuss a rate rise.

Verdict

WITH the homes market slowing rapidly and economic activity braking, a no-change decision by the Bank looks a certainty. The focus now is on whether rates have peaked - City economists are split on this. Without a pronounced economic bounceback, it will be hard for the MPC to justify lifting borrowing costs again. We think rates will remain on hold until well into next year and the next move will be down.