BoE holds rates at 5.75 pct, sees CPI at or below target in coming months

Sep 6, 2007 - The Bank of England's rate-setting Monetary Policy Committee has kept its official interest rate unchanged at 5.75 pct for the second month running and issued its first statement to an unchanged decision for more than eight years in order to address the turmoil in financial markets over the last few weeks.

The BoE said it is too early to tell how the turmoil in financial markets will affect the availability of credit to companies and households, adding that it will monitor closely developments in credit markets.

"It is too soon to tell how far the disruption in financial markets will impair the availability of credit to companies and households," it said.

"As stated in its August Inflation Report, the MPC is monitoring closely the evolution of both credit spreads and the quantities of credit extended, alongside all other data relevant to the outlook for inflation," it added.

On inflation, the BoE noted that the annual CPI rate fell back below its 2.0 pct target to 1.9 pct in July and may remain around, or a little below the 2 pct target for the next few months.

It said pay pressures remain muted and noted tentative signs of a slowdown in consumer spending.

However, the BoE said the recent solid pace of output growth has been sustained and that the margin of spare capacity appears limited. Indicators of pricing pressure also remain somewhat elevated, it added.

"Against that background, the committee judged that no change in Bank Rate was necessary at this meeting to keep inflation on track to meet the target in the medium term", it concluded.

This was the first time the BoE issued a statement on an unchanged rate decision since May 1999, and only the third time since it gained independence in 1997.

The decision was fully anticipated, with none of the 36 analysts polled by Thomson Financial News expecting the Bank to change borrowing costs until it can assess the impact of the turbulence in the financial markets.

Looking forward the future path of interest rates is now very unclear. The August Inflation Report indicated that one more interest rate rise would be needed in the coming months to bring the annual rate of CPI inflation back to the Bank's 2.0 pct target over the medium term.

However since then the turmoil in the credit markets has pushed market rates significantly above the base rate, and figures revealed the fall in annual CPI Inflation to below the BoE's target.

This has forced many analysts to change their forecasts. Now 11 out of 35 economists expect rates to hit 6.00 pct by the end of the year, compared to 24 out of 35 at the start of last month.

"More challenging financial market conditions present downside risks to the outlook, although recent data releases provide comfort that the UK economy entered this turbulent period on a relatively strong footing," said Andrew McLaughlin, chief economist at the Royal Bank of Scotland.

The markets will be looking for further guidance when the minutes to today's meeting are published on Wednesday, September 19.