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Interest rates held at 5%


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Interest rates held at 5%

# Ashley Seager, economics correspondent

# guardian.co.uk,

# Thursday May 8 2008

The Bank of England held interest rates steady at 5% today as it decided that inflationary risks were too great to allow it to cut borrowing costs to boost the flagging economy.

The monetary policy committee's decision followed a flurry of gloomy data about the state of the economy and there had been calls for the bank to match last month's quarter-point cut and bring some relief to the struggling property market.

Nicholas Leeming, of propertyfinder.com, was unhappy at the lack of action: "The Bank can't afford to wait another month before it acts again. Mortgage lenders have all but withdrawn from the market, leaving many home-buyers unable to qualify for financing and many more unable to get it at a price they can afford.

"The housing market has come to a standstill but there's no shortage of buyers, just a shortage of mortgages, which is now impacting the wider economy. We are in unfamiliar waters and inflation remains a threat, but further immediate intervention, as well as future rate cuts, is now essential to stimulate lending, the housing market and the economy."

The decision had been widely expected in the City, though most experts think the MPC will cut rates again in June by a further quarter of a point. Some economists, though, had expected that the MPC would cut rates after a run of weak data in recent weeks from the dominant services sector, the manufacturing sector, the housing market and the retail sector.

David Kern, economic adviser to the British Chambers of Commerce, said he was disappointed the MPC had not cut rates. "Most analysts have predicted correctly that the MPC would be reluctant to cut rates again in May. However, we believe this decision was a mistake given the serious threats to economic growth. The MPC has missed a valuable opportunity to underpin business and consumer confidence and to limit the potential damage to the economy."

Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors, said that slowing economic activity was the most pressing issue for the authorities. "Housing transactions have collapsed, consumer confidence has sunk to its lowest level since 1992, the service sector appears close to stagnation according to the latest CIPS survey and the retail sector is under immense pressure."

With mortgage approvals down nearly to half what they were a year ago and housebuilders' reservations having tumbled by two thirds, economists are concerned that falling house prices and tumbling consumer confidence could lead to a slump in consumer spending, which accounts for two thirds of the economy.

Latest estimates suggest the economy has slowed to well below its long-term average growth rate and is likely to slow further. However, the MPC is conscious that inflation is above its 2% target and likely to in the coming months, pushed by record high oil prices and rising food prices. Oil prices hit a fresh high of $123.93 yesterday.

Full story, source: The Guardian

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