BoE holds rates steady

The Bank of England kept interest rates steady at 5.0 percent on Thursday and economists are divided over whether borrowing costs will need to rise again next year. All 50 economists polled by Reuters last week had predicted the Bank's Monetary Policy Committee would keep rates on hold a month after raising them for the second time since August.
The outlook is less clear. Thirty-four of the 50 said rates would stay the same at least until at least March and 16 predicted an increase. The MPC may be similarly torn. Three members said last week they thought the risks to the Bank's inflation forecasts published last month were to the upside. But two others had even opposed last month's rise.
The economy has also been sending mixed signals. The housing market and services sector are buoyant but manufacturing activity and consumer spending appear to be slowing.
While inflation remains well above the Bank's 2.0 percent target, the stronger pound should tighten monetary conditions just as the giant US economy appears to be slowing down. But there is still a risk that the rising cost of living will encourage workers to demand higher wages in the New Year pay round and analysts say that this will dictate monetary policy in early 2007.
"Today's decision was no surprise but people should not be fooled into thinking interest rates have definitely peaked," said Graeme Leach, chief economist at the Institute of Directors. "It is still a 50:50 call as to whether interest rates go up again in the New Year."
Britain's economy has given out mixed signals in recent weeks. The housing market and services sector continue to accelerate but manufacturing activity and consumer spending appear to be slowing.
Annual house price inflation hit a 20-month high in November, according to Halifax data, while the country's services sector grew at its fastest pace last month in almost three years.
Manufacturers and retailers, however, look to be having a tougher time. Data on Wednesday showed industrial output contracted in October for the first time in over a year and anecdotal evidence suggests consumers are tightening the purse strings.
The Bank of England remains upbeat on the growth outlook and predicts the economy will expand 3 percent next year. Nevertheless recent comments from the bank's rate-setters have highlighted growing divisions on the policy committee.