Bank keeps freeze on rates

THE Bank of England today decided to play Santa rather than Scrooge and left interest rates on hold at 4.75% for the fourth month in a row. The no-change decision by the rate-setting monetary policy committee was widely expected. Evidence is mounting that five rate increases in the past year have begun to deflate the credit boom on the High Street and slow the property market. According to a BDO Business Trends survey earlier this week, retailers are braced for a tough Christmas, while Halifax bank predicted a 2% fall in house prices next year. Inflation, which rose to 1.2% in October, is still well below the Bank's 2% target, though soaring oil prices have put pressure on High Street prices. Adding to the gloom, manufacturing and production figures continue to fall. For the three months to the end of October, output from the production industries was down 1.7% on the previous quarter, while manufacturing suffered a 0.8% decrease.The debate in the City has moved from how far rates will rise to whether they may have peaked. Martin Ellis, Halifax group economist, believes interest rates have peaked for this economic cycle. 'The Bank of England is seeing signs of the housing market and consumer spending cooling and a general softening in the economy.'We are looking at a reduction in interest rates to around 4.25% in the second half of next year. The Bank will want to see how the economy performs in the first half but there is definitely scope for cuts.' But Simon Rubinsohn, chief economist at broker Gerrard, predicts further rises. He expects increases of between 0.25 and 0.5 percentage points next year if UK growth exceeds forecasts. 'The US economy is showing signs of life and oil prices have started to fall from their recent highs, which could give the UK economy a real boost,' he said. 'If that is the case, then I expect the Bank of England to look at the rates issue again.'However, Deutsche Asset Management global chief economist Steven Bell, famed for being one of the first economists to predict the property crash of the late Eighties, expects rates to fall as early as February. Bell said rates should come down to 4% over the course of the year as the Bank aims to breathe more life bank into the economy. 'The housing boom is over, consumer spending will fall and as there has been a sharp fall in Government spending as Gordon Brown runs out of money, so growth should tail off.'Investec Bank chief economist Philip Shaw agreed. He said: 'Although we have had a run of soft economic data the MPC doesn't believe the extent of that offering. I think we will see a small rise in February or May.'Shaw said survey figures for spending and manufacturing are looking positive and official figures should reflect that when the are published early next year. A 0.25 percentage points rate rise would add ?176 a year to repayments on a 25-year ?100,000 mortgage, while a 0.5 point rise would increase annual costs by ?355.