Rate freeze likely amid debt splurge

A SUMMER High Street spending spree and record borrowing look set to ensure interest rates will stay on hold following the Bank of England's meeting this week.

The Bank's monetary policy committee is widely tipped to freeze the cost of borrowing at a 48-year low of 3.5% when its two-day meeting ends on Thursday.

A no-change decision would follow July's surprise cut, backed by all nine MPC members apart from the Bank's new Deputy Governor, Rachel Lomax.

A Reuters poll of 42 economists found them unanimous in predicting that the MPC would keep policy unchanged. Indeed, some experts are even questioning whether last month's policy easing was a mistake. 'The latest rate cut will further exacerbate the imbalances evident in the economy,' said John Butler at HSBC.

Top of the MPC's agenda will be the rebound in consumer spending, apparently paid for on the never-never. The hottest June since 1976 led to a surge in High Street sales as shoppers snapped up summer clothes, barbecues and picnic food. Retail sales leapt by 1.9% compared with figures for May, the biggest one-month increase since November 2001.

A few days later, figures showed Britons borrowed a record £10bn in June, taking total debt to £878bn - equivalent to £35,000 per household or about 120% of disposable income. Following warnings from the Treasury Select Committee that many people's appetite for debt was putting their futures on the line, the MPC will be reluctant to encourage borrowing further.

Also arguing in favour of a steady-hand policy is tentative evidence that the manufacturing sector may have finally turned a corner. The latest CIPS/Reuters purchasing managers' report, regarded as a reliable barometer, shows the first expansion in activity for nine months.

On the doves' checklist will be the unexpected fall in inflation to 2.8% and further evidence that the housing market is cooling. Economist Philip Shaw at Investec said: 'We think it extremely unlikely that the MPC will move rates in either direction.'