Bank of England

Bank of England May Keep Rate at 5.25% as Inflation Accelerates

By Jennifer Ryan

March 6 (Bloomberg) -- The Bank of England will probably keep the benchmark interest rate unchanged today as accelerating inflation prevents policy makers from lowering borrowing costs to support economic growth.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, will leave the bank rate at 5.25 percent, according to 59 of 60 economists in a Bloomberg News survey. One forecast a quarter-point reduction. The central bank will announce the decision at 12 p.m. in London.

Factories and service companies raised prices at the fastest pace on record last month, surveys showed this week. The central bank predicts inflation may accelerate above 3 percent this year, adding to the dilemma for policy makers as they consider whether to cut interest rates to cushion the U.K. economy from falling house prices and higher credit costs.

``There's a balance of risks for the MPC, with a sharp weakening of growth on the one hand and pretty strong inflation pressures on the other,'' said Nick Bate, a U.K. economist at Merrill Lynch & Co. in London. ``They cut rates last month, and the risks are such that they won't cut again this month.''

The Bank of England's benchmark rate is the highest among the Group of Seven industrialized nations. The U.S. Federal Reserve has lowered its key rate 2.25 percentage points since September to 3 percent. The European Central Bank will keep its benchmark at 4 percent today, all 54 economists in a Bloomberg News survey predict.

Pound Record

The pound fell to a record low of 76.89 pence against the euro yesterday on speculation of further interest-rate cuts by the U.K. central bank after quarter-point reductions in December and February.

The central bank signaled on Feb. 13 that the interest rate may not fall to 4.5 percent as investors were betting, and raised its inflation forecast, saying it may exceed 3 percent later this year after oil prices reached a record and wheat prices doubled in a year. Inflation was 2.2 percent in January, the fastest pace in seven months.

An index of prices for service companies from banks to airlines rose to the highest since records began in July 1996, and a measure for manufacturers reached the highest in at least nine years, surveys by the Chartered Institute of Purchasing and Supply showed this week.

U.K. consumers last month predicted that prices will rise 3.1 percent in the next 12 months, close to the highest result since at least 2005, a YouGov Plc survey for Citigroup Inc. showed Feb. 26. Bank of England Deputy Governor Rachel Lomax said the same day she's concerned higher prices will become embedded in the economy.

Inflation `Worry'

``Inflation is still a worry, and particularly inflation expectations,'' said George Buckley, chief U.K. economist at Deutsche Bank AG in London.

The threat of inflation has led some business leaders to stop short of calling for further interest-rate cuts soon.

``I'm not crying out for immediate action in the short term,'' Ian Tyler, chief executive officer at Balfour Beatty Plc, Britain's biggest builder, said in an interview yesterday on Bloomberg Television. ``The health of Balfour Beatty depends upon long-term stability rather than short-term reactions.''

Higher food and energy costs are also sapping consumer sentiment. Confidence among shoppers slipped to the lowest level in more than three years in February, Nationwide Building Society said yesterday. Consumer spending rose 0.2 percent in the fourth quarter, the least in more than a year.

Credit Losses

Economic growth is slowing after contagion spread from the U.S. subprime mortgage market slump, which has prompted about $181 billion in asset writedowns and credit losses at financial institutions since the start of 2007. The central bank forecasts expansion will cool this year to an annual 1.6 percent rate in the fourth quarter, matching the slowest pace since 1993.

``We may well see further shocks as year-end financial results are published,'' Edward George, who led the U.K. central bank from 1993 to 2003, said at a conference in Edinburgh yesterday. ``I used to be Bank of England Governor, and I'm rather glad that I'm not today.''

The property market is also weakening. House prices fell for a fourth month in February in the worst streak of declines since 2000, Nationwide Building Society said Feb. 29.

``We're on the verge of a year where we see no growth in house prices, but it's more suggestive of a slowdown in the economy than a recession,'' said Trevor Williams, chief economist at Lloyds TSB Group Plc in London. ``We will see just one more interest rate cut.''

Most economists predict three more reductions this year. The rate will reach 4.5 percent, according to the median of 43 forecasts in a Feb. 29 survey.

To contact the reporter on this story: Jennifer Ryan