Bank of England holds rates as economy falters

LONDON (AFP) - The Bank of England held its key short-term interest rate at 5 percent on Thursday in the face of high inflation, sliding economic growth and a housing market downturn.

Analysts said Britain's economy needed a rate cut to boost growth, but the BoE had to sit tight for some time because of high inflation caused by record-high oil prices and soaring food costs.

"Inflation risks will make the MPC very reluctant to bring rates down at any time soon, and we think the committee will try to ride the situation out for a few months and then cut rates early next year," Investec Securities analyst Philip Shaw said following the BoE's decision on British borrowing costs.

The BoE's monetary policy (MPC) committee made the widely-expected announcement on borrowing costs after its latest monthly meeting which had begun on Wednesday.

The central bank will provide reasons for its latest rate call in minutes of the two-day meeting to be published on July 23.

"Some MPC members are likely to have continued to highlight concerns that high and rising headline inflation could feed into inflation expectations, core prices and/or wages," said Lehman Brothers economist Peter Newland.

"However, other committee members ... may have raised the issue of the need for rate cuts given the very weak tone to activity data in recent weeks," he added.

Twelve-month inflation hit a 16-year high point of 3.3 percent in May, according to official data.

Meanwhile the economy grew only 0.3 percent during the first three months of 2008, the lowest quarterly expansion for three years amid the global credit crunch and a slowing property market.

In addition, weak manufacturing and services sector data published this week pointed towards a potential recession for Britain, economists said.

Last Thursday, the European Central Bank raised eurozone lending rates by a quarter-point to a seven-year high point of 4.25 percent in a move aimed at fighting record inflation.

A further major worry for Britain is a current downturn in its housing market. House prices in Britain slumped 6.1 percent in June compared with the same month last year, the largest annual decline for more than 15 years, home loans provider Halifax said on Thursday.

The news that prices fell at the fastest 12-month rate since March 1993, prompted warnings from economists that the country's property market downturn could worsen.

Halifax, part of British banking group HBOS, added in its latest monthly survey that house prices dropped by 2.0 percent in June from May.

"Today's data does nothing to dilute concerns that the housing market is in the initial stages of an extremely sharp correction," said Capital Economics analyst Seema Shah.

"Slowing economic activity, combined with continued problems in the mortgage markets, suggest that further sharp falls lie in the pipeline."

In June, the US Federal Reserve kept its main interest rate at 2.0 percent, saying the likelihood of a sharp economic downturn had diminished while inflation risks had increased in the United States.

The key rate set by central banks affects mainly short-term market interest rates. Long-term rates are set by the market on judgements of many factors and principally perceptions of how medium-term inflationary pressures are being managed.

Bank of England website