BoE keeps interest rates at 4.5 percent

The Bank of England held interest rates at 4.5 percent on Thursday after last month's quarter-point cut, but analysts are increasingly divided over the direction and timing of its next move.
All 47 analysts polled by Reuters last week had predicted no change, especially as four of the BoE's nine-member Monetary Policy Committee, including Governor Mervyn King, had opposed August's rate reduction because of worries over inflation.
"The nascent recovery in domestic demand is neither strong enough to warrant an immediate reversal of the August cut, nor weak enough to prompt back-to-back rate cuts," said Andrew McLaughlin, chief economist at the Royal Bank of Scotland Group. Financial markets barely budged as the decision was so widely expected.
But most analysts polled last week still expected a slowing economy would prompt the central bank to cut rates again, although there was no agreement on whether the next reduction would be this year or in 2006.
Eight of the 47, however, predicted the BoE's next move would be a rise as it tries to keep a lid on inflation, pushed higher by soaring oil prices. In July, inflation surprisingly rose to 2.3 percent, above the BoE's 2.0 percent target for the first time since the current CPI measure was adopted in December 2003.
Record oil prices and surging utility bills suggest consumer prices could rise even faster in the months ahead and King has expressed concern this could push up inflation expectations.
Other economists note, however, that higher petrol prices and gas bills could hit consumers' wallets, leaving little chance of any pick-up in spending after the sharp slowdown at the start of the year.
They argue that means the BoE is too optimistic about economic growth further out and more rate cuts will be needed, particularly if the global economy takes a hit from Hurricane Katrina and the soaring oil prices.
"We are more pessimistic than the BoE about growth prospects and believe that further below-trend expansion and a modestly softening labour market will increasingly alleviate underlying inflationary pressures, notwithstanding persistently strong oil prices," said Howard Archer, economist at Global Insight. The BoE offered no statement to accompany its rate decision.