Sterling at two-month low as rates are kept on hold

STERLING HIT a two-month low yesterday after the Bank of England decided to keep interest rates on hold at 7.5 per cent.

Bonds rose as dealers speculated that the next move in UK interest rates would be down.

Jonathan Loynes, at HSBC Securities, said: "If the MPC had wanted to raise rates today - and some members almost certainly did - it had a number of perfectly reasonable excuses. The fact that a majority of members chose not to therefore suggests that there is a very good chance that rates have now peaked."

However, not all analysts agreed that June's rate rise was the last, warning that the Monetary Policy Committee had wrong-footed the experts before.

Economists speculated that the MPC was swayed by a raft of gloomy business surveys released over the past month, as well as growing signs of a slowdown in UK services. Yesterday saw the release of yet another downbeat business survey, which revealed that retail sales growth in July was the slowest for three years.

The Confederation of British Industry distributive trades survey found that 37 per cent of retailers reported increased sales last month compared with the corresponding period last year, while 31 per cent said sales were down. This means a positive net balance of just 6 per cent of retailers reported a sales increase in July, compared to 19 per cent in June and 25 per cent in May.

Alastair Eperon, chairman of the CBI's distributive trades survey panel, said: "The further slowdown in retail sales growth suggests that consumers have been discouraged by a combination of high interest rates and bad weather."

The weakness of the survey surprised the City, which had been expecting a more gradual slowdown in the growth of retail sales. Simon Briscoe, of Nikko Europe, said: "The boom of the last two years is now consigned to the history books."

The consensus view in the City was that base rates have peaked, and sterling fell by more than a pfennig to close at DM2.887. The September long gilt future rose 0.32 to 109.7.

The MPC gave no indication of why it decided to hold rates or whether rates were now high enough, although the Bank of England will provide a detailed assessment of the outlook for inflation next week when it releases its quarterly inflation report. As rates were not raised yesterday, analysts are now expecting a benign inflation report, and predicted that the Bank's forecasts for economic growth would be gloomy.

However, several economists refused to rule out another rate rise, saying that the MPC had surprised on the upside before. Sharda Persaud, of Paribas, said: "We had a benign inflation report in May, and the MPC hiked [rates] in June." Michael Saunders, of Salomon Smith Barney, said: "If the pound now falls sharply then the MPC may have to reconsider its view."

Separately yesterday, the Department of the Environment said housing starts were down 11 per cent in the second quarter and construction new orders were down 4 per cent, adding to the evidence of economic slowdown. The Society of Motor Manufacturers and Traders said new car registrations rose slightly in July, up 5.1 per cent to 37,896.

Outlook, page 17