Breaking news: Interest rates remain unchanged

Jul 10 2008 By Andrew Mernin

INTEREST rates were kept on hold for the third month in a row today as the Bank of England continued its fight to keep inflation under control.

The Bank held borrowing costs at 5% despite mounting signs of economic gloom, prompting fears over a potential recession.

The ``no change" call gives little respite to homeowners and borrowers already faced with soaring petrol, food and household energy bills.

But the widely-expected decision comes as the Bank’s nine-strong Monetary Policy Committee (MPC) grapples with inflation well above its 2% target at 3.3% - and set to rise further still due to factors such as surging oil prices.

The MPC is facing a delicate balancing act between taming inflation and avoiding a sharp slowdown. Business leaders at the British Chambers of Commerce warned of a ``serious risk" of recession this week.

The UK has also been hit by a fresh blizzard of poor news from the housing market - with builders axing around 5,000 jobs and today’s Halifax survey showing a 2% fall in prices during June.

This is hitting consumer confidence as the impact of the credit crunch spreads to the wider economy.

Graeme Leach, the Institute of Directors’ chief economist, said rate-setters were ``caught between a rock and a hard place".

``At this point we believe it is correct to err on the side of caution with regard to inflation and leave rates unchanged.

``The MPC is acutely aware that if the inflation genie escapes from the bottle, it will be very hard to put it back in again," he said.

But recent downbeat survey data have added to the pressure on policymakers after signalling falling activity in services, manufacturing and construction sectors during June.

Ross Smith, head of policy and research at the North East Chamber of Commerce, said a rate cut could have helped lift the region's strong export market.

He said: "The decision came as no great surprise to businesses around the region. With rising oil and commodity prices, Mervyn King has argued for restraint until prices settle.

"It is evident for all to see that businesses are under the same price pressures as households and yet the latest NECC North East Business Barometer showed that the North East economy is benefiting from its strong exporting pedigree and a further rate cut would assist firms operating on the global stage.

“In the face of flagging consumer and market confidence it is necessary that steps are taken to support the economy and to generate confidence.”