Bank of England holds rates steady at 3.5%

Banking chief confident in the consumer's ability to pay back debt even if rates rise in the next few months

The Bank of England decided not to cut interest rates yesterday amid tentative signs that economic activity is picking up across the world.

The decision to keep the base rate at its 48-year low of 3.5 per cent had been widely expected following news of record consumer debt, booming high street sales and even a slight recovery for manufacturing.

The monetary policy committee may also have been influenced by a recent fall in the pound although the minutes of the meeting will not be published for a fortnight.

Business leaders said they accepted the decision, which followed the unexpected cut in July, but urged the Bank to stand ready to cut again if conditions worsened. Doug Godden, head of economic analysis at the Confederation of British Industry, said: "It is difficult to argue with this decision. However, business will look to the MPC to monitor the global situation and be prepared to cut again if the situation warrants it."

But there is disagreement among economists as to whether the UK has hit the bottom of the monetary policy cycle. Roger Bootle, managing director of Capital Economics, said slower house prices and consumer demand combined with falling inflation would lead to a further cut. "We expect these factors to prompt a further modest loosening of policy to support growth," he said.

His view was bolstered by figures from the British Retail Consortium yesterday showing high street prices fell 1.1 per cent in July. "The MPC can relax," said Bill Moyes, its director general. "Consumer spending is not generating inflation."

But a majority of City economists forecast the next move in rates would be up - although that might not occur for a whole year. Ross Walker, at Royal Bank of Scotland, said rates had hit the floor with the first hike not coming until the first quarter of 2004. "The MPC had justified July's rate cut by citing a hesitant global recovery and slowing consumer demand," he said. "June's rise in retail sales and a record surge in consumer credit are hardly indicative of waning consumer demand and will have served to persuade the MPC that recovery is more firmly rooted."

Hopes of a synchronised global recovery were boosted by positive news from the US and the eurozone. In its monthly bulletin the European Central Bank hinted there were no more rate cuts on the table, saying there were signs economic confidence was "stabilising".

"There is increasing reason to expect that economic activity will recover gradually in the second half of 2003 and strengthen further in 2004," it said.

Stephen Lewis, chief economist at Monument Securities, said: "ECB policymakers seem far from granting another rate reduction."

Meanwhile in a triple dose of good news for the US productivity soared, new claims for unemployment benefits dropped to a six-month low and retailers reported strong sales.

Worker productivity accelerated in the second quarter to an annual rate of 5.7 per cent, more than double the first quarter's 2.1 per cent gain. Meanwhile, new jobless pay claims were below the crucial 400,000 level for a third week in a row.