Interest rates held at 3.5%

The Bank of England has decided to maintain interest rates at 3.5%

The Monetary Policy Committee’s decision was widely expected as they cut interest rates by 0.25% last month. Interest rates continue to be at their lowest level for 48 years.

Interest rates were cut last month due to the poor outlook suggested by economic data with house prices, consumer spending and manufacturing stagnating.

However, the latest economic data shows signs of improvement. House prices have continued to show strength with the Halifax reporting the first signs of a recovery in the London and Southeast of England housing market.

Manufacturing continues to languish in the doldrums whilst the construction and retailing industry all reported high levels of buoyancy. Rapidly expanding consumer debt has also removed ay chance of an interest rate cut this month.

Manufacturing recorded a slight improvement last month of 0.2% in June but this was still far behind the robust growth in retailing and construction.

The MPC had been given some room for manoeuvre with the publication of the latest shop price index. The British Retail Consortium (BRC) released figures today that showed prices on the high street fell by 1.1% in July.

Prices in the shops were still found to be increasing at a much slower rate than prices of other goods and services. The three-month average between April 2003 and June 2003 for the RPIX (excluding mortgage interest payments) was 2.9% whilst the shop price index (SPI) increased by 0.84% over the same period.

The BRC’s Director General, Bill Moyes commented, ‘Over the year shop prices have increased well below the general rate of inflation. This is due to the intense competition on the high street. So, the MPC can relax. Consumer spending is not generating inflation.’

The Confederation of British Industry (CBI) welcomed the decision to hold interest rates despite calling for a cut to help manufacturing and business confidence.

Doug Godden, CBI Head of Economic Analysis commented, ‘Interest rates appear to be set at the appropriate level for now. However, business will look to the MPC to monitor the global situation and be prepared to cut again if the situation warrants it.’

The British Chamber of Commerce’s Director General, David Frost added, ‘The MPC has rightly chosen to keep rates on hold this month. Last month’s rate cut provided an important boost at a time when the business outlook was looking particularly weak. Since then we’ve seen a promising signs with a rebound in retail spending and very tentative growth in manufacturing output. With inflation under control and rates at 3.5% there is scope for further cuts if demand fails to recover during the year.’