BoE keeps rate unchanged at 5.25%

The Bank of England left its benchmark interest rate unchanged today, awaiting more signs of inflation pressures before deciding whether a fourth increase is needed.

The nine-member Monetary Policy Committee kept the bank rate at 5.25 per cent, as predicted by all except eight of the 60 economists in a Bloomberg survey. The rest expected a quarter-point increase, and a majority of economists forecast the rate will rise to 5.5 per cent by May.

Bank of England Governor Mervyn King said on March 27 it's "too early'' to say whether the pace of economic growth will fuel wage inflation, and a report today showed manufacturing output fell the most in more than a year in February. The bank's latest forecasts show one more rate increase will be required to bring inflation back to its 2 per cent target.

"A May move is the most likely outcome,'' said Alan Castle, an economist at Lehman Brothers Holdings Inc in London. "The bank was delaying the inevitable. As you go through the year, there's more chance the previous rate hikes will start to bite.''

Investors pared bets on an increase by the end of the first half. The implied rate on the June interest-rate futures contract dropped as much as 6 basis points to 5.71 per cent after the decision. The contract, which settles to the three-month London inter-bank offered rate for the pound, averaged about 15 basis points more than the central bank's benchmark for the past decade.

The pound fell as much as 0.2 per cent and was worth $1.9705 at 12:05 pm in London from $1.9740 before the announcement.

Faster Inflation
The Bank of England's three increases since August have so far failed to curb inflation. Average house prices surged 11.1 per cent in the first quarter, the most in two years, said HBOS Plc, Britain's biggest mortgage lender, today. Consumer prices unexpectedly jumped 2.8 per cent in February from a year earlier, the second-biggest increase in a decade.

The bank has observed "a noticeable rise in the number of firms that say they are now confident that they can make price increases stick,'' King said March 27. That "is concerning us.''

Severfield-Rowen Plc, the UK steel supplier that helped build Arsenal Football Club's new stadium, said on April 3 it's passing higher prices to customers in a "managed way.''

The Bank of England is raising borrowing costs along with the European Central Bank and the Bank of Japan. The ECB has increased its main rate seven times since the end of 2005, taking it to 3.75 per cent last month. Japan's central bank in February doubled its benchmark to 0.5 per cent.

Inflation Bias
The US Federal Reserve has left its main rate at 5.25 per cent since June, though Chairman Ben S Bernanke said March 28 it still has an "inflation bias.''

Britain's key rate may be close to a peak. King said last week the dangers posed by higher pay may be easing and the Office for National Statistics said March 20 that wage inflation slowed to the slowest pace in four months in the quarter through January.

David Blanchflower, a member of the rate-setting committee, last month voted for a rate cut, arguing that pay pressures are now "benign.'' The other eight policy makers voted to leave borrowing costs unchanged.

Manufacturing, which accounts for about 15 per cent of the economy, unexpectedly declined the most since October 2005 in February, the statistics office said today.

PSA Peugeot closed its factory in Ryton, England, this year and Toyota Motor Corp has scaled back output at its plant to change over its production line to make a new model.

"Inflation should come down and stay down,'' said Geoffrey Dicks, chief UK economist at Royal Bank of Scotland Group Plc in London. "Pricing power isn't a permanent feature of the landscape.''

Growth Outlook
The Bank of England forecast in February that annual growth will accelerate to 3 per cent in 2007, which would be the fastest pace in three years.

The International Monetary Fund said today the global economy will probably weather a slowdown in the US economy, which would ease pressure on the UK exporters coping with the pound's surge to a 15-year high against the dollar.

"The majority of MPC members still see inflation risks,'' said Peter Newland, an economist at Lehman Brothers Holdings Inc in London. "There's definitely another rate rise to come.''