Weak UK economic data suggest rates to remain low

AP News
Posted: May 04, 2011 8:54 AM
Weak UK economic data suggest rates to remain low

Figures showing a slowdown in the construction sector and falling house price prices reinforced market expectations that the Bank of England will keep its benchmark interest rate at the record low of 0.5 percent for a few more months.

Wednesday's downbeat economic news came as the bank's rate-setting Monetary Policy Committee began its monthly two-day policy meeting, and analysts said the figures would do little to swell the ranks of those on the nine-member panel voting for higher borrowing costs.

As well as the central bank itself reporting a 60 percent drop in mortgage lending in March, the Nationwide Building Society said house prices resumed their downward trend in April and a Markit/CIPS survey showed construction growth slowed sharply in the same month.

Analysts say the signs of stagnant economic growth, combined with slowing inflation, have killed off any prospect of a rate hike when the bank announces its decision on Thursday.

"In fact, we believe the odds now favour the Bank of England holding off from raising interest rates until November," said IHS Global Insight economist Howard Archer, who had previously pegged a rise in August.

The central bank has held interest rates at 0.5 percent since March 2009. Rates were slashed to that level in the wake of the global financial crisis. The bank also undertook a 200 billion pound ($330 billion) asset purchase program _ so-called quantitative easing _ after running out of room on the interest rate front.

Economists had started to factor rises in their forecasts for the coming months as inflation soared way above target, believing the bank would need to act to rein in spending despite ongoing sluggish domestic growth.

The bank's aim is to hold the annual rise in the consumer price index to 2 percent, plus or minus one percentage point, a target which has been exceeded for 15 straight months.

However, consumer price inflation unexpectedly fell back to 4 percent in March from 4.4 percent in February.

Gross domestic product, meanwhile, rose 0.5 percent in the first quarter of this year. But that followed a 0.5 percent contract in the final quarter of last year, leaving GDP broadly unchanged over the six months.

"Low activity levels in the housing market, tighter government purse strings, rising input prices in fuel and materials, as well as poor cash flow in some cases, are clearly a worry," said David Noble, chief executive at the Chartered Institute of Purchasing and Supply.

That leaves economists expecting the majority of the Monetary Policy Committee to vote to hold rates steady, despite a three-way split in the group in recent months.

This is the last month for the committee's arch-hawk Andrew Sentance to win favor for a significant rate hike. Sentance has in recent months voted to raise rates to 1 percent to counter inflation. Two other committee members, Spencer Dale and Martin Weale, have for the past two months backed a hike to 0.75 percent.

Yet another member, Adam Posen, has instead voted to pump another 50 billion ($83 billion) into the bank's quantitative easing program to boost economic growth.