Bank of England likely to hold fire on rates

The Bank of England looks set to leave interest rates at 5.25 per cent for a second month running as it waits to see whether three increases since August have been enough to curb inflation.

Volatile stock markets and data showing inflation fell back sharply in January have bolstered expectations that the central bank will hold fire at its monthly meeting.

Investors will still be nervous because two of the last three increases in interest rates took the market by surprise and the Bank's own inflation forecasts show another rate rise is likely at some stage.

A Reuters poll of economists gave a 30 per cent chance of a rate rise when the BoE announces its verdict at noon GMT and money market rates reflect an even smaller possibility. Still, most investors reckon British interest rates will rise one more time to 5.5 per cent by the summer.

"The main argument against moving this month is the current bout of volatility in financial markets," said Andrew Smith, chief economist at consultancy KPMG.

"However, this is a global phenomenon and what the Monetary Policy Committee does will make little difference one way or another. The Bank has surprised the markets twice in the last six months with rate rises - March could make it a hat-trick."

Annual inflation has been above the government's two per cent target since last May and hit a decade-high of three per cent in December. But it slowed to 2.7 per cent in January and is forecast to fall further in the coming months as last year's energy price rises fall out of the annual comparison.

A rush by utility providers to slash household energy bills will hasten the decline. British Gas, Npower and Powergen have already announced price cuts and others are expected to follow.

Recent falls on global stock markets give a further reason for the BoE to take a wait-and-see approach. Britain's FTSE 100 index dropped nearly five percent last week as European equity markets suffered their worst weekly decline in four years.

While Bank policymakers may view the recent losses as nothing more than a healthy correction, they will be aware that any prolonged decline could dampen consumer confidence and spending.

Retail sales fell at their sharpest rate in four years in January, according to official figures, though surveys from the Confederation of British Industry and the British Retail Consortium have painted a more upbeat picture.

The outlook for wages is similarly mixed. Wages pressures in the private sector picked up at the start of the year, according to two surveys on Wednesday, but public sector workers face average rises of just 1.9 per cent after the toughest pay round in a decade.