Bank of England May Keep Key Interest Rate on Hold at 5.75%

By Brian Swint
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Sept. 6 (Bloomberg) -- The Bank of England may leave its benchmark interest rate unchanged today as policy makers try to prevent an increase in corporate borrowing costs from hurting growth, a survey of economists showed.

The Monetary Policy Committee, led by Governor Mervyn King, will keep the bank rate at 5.75 percent, according to all 60 economists surveyed by Bloomberg News. The bank will announce the decision at noon in London.

The central bank yesterday took its first steps to curb U.K. money-market rates, which have climbed to the highest since 1998, following the collapse of the U.S. subprime mortgage market. The turmoil has clouded the economic outlook less than a month after the bank signaled that five rate increases in the past year may not be enough to contain inflation.

``We'd be very surprised to see another rate hike,'' said Steven Bell, chief economist at hedge fund GLC Ltd. in London and a former U.K. Treasury official. ``Though recent data has been strong, the effects of past tightening, the money-market tightening and the turmoil itself will slow growth and keep inflation under control.''

The Bank of England yesterday offered to provide extra money next week to reduce ``unusually high'' overnight interest rates. The European Central Bank said it is ``closely monitoring the situation'' and it ``stands ready to contribute to orderly conditions'' as soon as today.

The ECB will probably keep its benchmark rate at 4 percent today, all 56 economists surveyed by Bloomberg News predict. The U.S. Federal Reserve left its rate at 5.25 percent on Aug. 7.

Lending Rates

Commercial banks have been reluctant to lend to each other on concern about borrowers' vulnerability to securities backed by U.S. subprime mortgages, or home loans aimed at people with poor credit histories. The gap between the U.K. benchmark interest rate and the three-month money-market rate, known as the London interbank offered rate, was the biggest in 20 years yesterday. The rate was at 6.8 percent, compared with 6.03 percent on July 27.

The Bank of England's nine policy makers voted unanimously to keep the benchmark rate unchanged at a six-year high on Aug. 2, minutes of the decision showed. The bank will publish minutes of today's meeting on Sept. 19.

Policy makers also said last month they had ``no firm view on whether rates needed to rise further,'' while their forecasts released Aug. 8 suggested the benchmark rate needs to reach 6 percent to get inflation to the 2 percent target in two years.

`Superseded by Events'

``Any statements that have hinted at rate increases have been superseded by events in the market,'' said Neil Mackinnon, chief economist at London-based hedge fund ECU Group Plc. ``At the very least, they have got to be on hold. Should the credit crunch affect the economy, there are strong arguments that they should cut rates.''

The number of economists predicting that the U.K. rate will rise to 6 percent by the end of the year fell to 18 out of 51 economists in the Aug. 31 survey. A month ago, more than half of those polled expected another increase.

Inflation slowed to 1.9 percent in July, below the 2 percent target for the first time since March 2006, after the cost of utility bills, food and furniture fell. The inflation rate was 3.1 percent in March, the highest in a decade.

Policy makers may still be concerned that companies will raise prices to cover higher materials costs and to take advantage of the pace of economic expansion. Premier Foods Plc, the maker of Hovis bread based in St. Albans, England, said Sept. 4 that it will raise prices to cover higher wheat and dairy costs.

Economic growth accelerated to 0.8 percent in the second quarter, up from 0.7 percent in the previous three months. Manufacturing expansion reached a three-year high last month and services growth unexpectedly quickened, surveys of purchasing managers showed this week.

House Prices

House prices, which contributed to an acceleration in consumer spending growth in the second quarter, rose for an eighth month in August, HBOS Plc said yesterday. Property values rose 11.4 percent from a year earlier, the report showed.

Higher central bank rates should cool economic growth in the second half and next year, the policy makers predicted in quarterly forecasts last month. They'll also be watching to see if commercial banks' tighter hold on credit in response to losses in securities linked to subprime mortgages in the U.S. will turn into a drag on growth.

``The bank will want to assess the economic impact of tighter credit conditions,'' said Brian Hilliard, director of economic research at Societe Generale in London, who used to work at the Bank of England. ``Rates will stay on hold.''

Last Updated: September 5, 2007 19:30 EDT