Rates to remain on hold

MARIAN BELL'S swansong on the Bank of England's monetary policy committee, which kicks off its latest meeting today, looks set to go off with a whimper rather than a bang.

Despite her reputation as one of the MPC's more dovish members, concerns about reflating the housing market bubble will rule out a cut in interest rates for now. Bell's three-year stint on the MPC finishes at the end of the month when Goldman Sachs economist David Walton takes over.

Jane Padgham weighs up the items on the MPC's agenda before it makes it decision at midday tomorrow.

Property

The housing market may have slowed dramatically since last summer's boom, but it looks to have avoided the crash that many had feared. Building society Nationwide reported a 0.3% rise in prices in May, building on April's 0.9% gain. However, the year-on-year rate of increase slipped to a mere 5.5% - the lowest for almost nine years. Mortgage approvals have picked up during the key spring buying season, promising to bolster property values over the summer.

High Street spending

Debt-laden consumers are continuing to tighten their purse strings. In a vivid illustration of the deepening crisis on the High Street, the CBI said March to May was the worst three months for retailers since the recession-hit autumn of 1992. The retail gloom indicates a fast-growing number of households are struggling to cope with hefty debt repayments in the face of higher interest rates.

Manufacturing

Latest news on the battered manufacturing sector has been dreadful. Hit by a combination of a strong pound, fierce competition from Asia and anaemic growth in the eurozone - Britain's key export market - factory output slid 1.6% in March. Apart from the Golden Jubilee, it was the worst performance in more than 10 years. Another industrial recession looks on the cards.

Economic growth

With manufacturing on its knees and the High Street in the doldrums, fears about the economy's health are growing. The Office for National Statistics said the economy expanded by just 0.5% in the first quarter of the year, less than the 0.6% previously thought and the weakest for nearly two years. The service sector has been the engine of growth but last week's purchasing managers' index suggests it is starting to be hit by the consumer slowdown.

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Inflation

Inflation stuck fast at a seven-year high of 1.9% in April, a whisker below the Government's 2% target. A fall in prices of fruit and veg offset dearer household utility bills, the ONS said. The Bank believes inflation will move above the target in the near term, before falling back to hit the 2% bull's-eye in two years, the time horizon it uses for setting monetary policy. Inflation has risen steadily from 1.1% over the past nine months.

After years of falling unemployment, the labour market looks finally to have turned. The claimant count measure rose by more than 8,000 in April, almost twice the increase City pundits had expected. It was the first time unemployment had risen for three consecutive months since the run-up to the Iraq war. In another sign that the jobs market is weakening, average earnings growth unexpectedly eased to just 4.1% once City bonuses were stripped out.

International economy

The rejection of the EU constitution by the French and Dutch has dominated overseas events in the past few weeks. Not only were the No votes a severe blow to Brussels, they also reflected concern about the economic malaise dogging the eurozone. The European Central Bank expects the 12-nation bloc to grow by just 1.4% this year. In the US, meanwhile, a growth slowdown has boosted hopes that the recent run of interest rate rises may be nearing its end.

MPC comments

Paul Tucker, who had pressed for a quarter-point rate rise in three previous meetings, switched his vote back to 'no change' in May. That left Bank Deputy Governor Sir Andrew Large as the only member of the nine-strong MPC to vote for higher rates. Meanwhile, Richard Lambert said tales of High Street gloom were 'too consistent' to be a statistical aberration.

Verdict

The City is betting its shirt on the MPC keeping interest rates at 4.75% for a 10th successive month. With the High Street in crisis and the manufacturing recovery stalled, a growing number of pundits believe the cost of borrowing has peaked. Less clear is when rates will start to come down, although financial markets are pricing in at least one quarter-point cut before the end of the year.