BoE keeps rate on hold

January 10, 2002 Posted: 1154 GMT

LONDON (CNN) -- The Bank of England left interest rates unchanged on Thursday, amid signs of strong consumer spending and increased borrowing.

The decision, which was widely expected, marks the second time in two months the BoE's monetary policy committee has kept rates on hold.

The BoE has cut its benchmark rate seven times in the past year, the most recent move coming in November when it trimmed half a point to 4 percent -- the lowest level in 37 years.

While many economist believe the central bank still has room to cut rates further, especially with inflation running at 1.8 percent -- well below the BoE's target of 2.5 percent -- Thursday's decision could mean rates have bottomed out.

In fact, there are indications the BoE may begin raising rates in the coming months.

BoE Governor Eddie George added fuel to the speculation, saying last week the bank might have to raise rates to slow consumer demand.

With retail sales rising and interest rates at the lowest level in four decades, George said consumers were spending too much and piling up too much debt. 

"If the world economy begins to pick up, as I suspect it will from the middle of the year, then consumer demand will have to moderate," George told the BBC. If that does not happen, he said, "that is when we would be putting up interest rates."     

Investment bank Bear Stearns, in an economic bulletin, said those comments were a "deliberate shot across the market's bows that UK rate policy is at a cusp."

Paul Donovan, an economist at UBS Warburg, agreed the governor's  comments "probably rule that out" another rate cut.

Another analyst said a rate increase is likely to come soon, considering the UK's resilience during the global economic downturn.

"It's clear the UK [economy] didn't swing as much as most," he said, and that means the BoE would be in a position to raise rates before either the European Central Bank or the U.S. Federal Reserve.

Recent economic numbers continue to show the BoE's committee will have plenty of economic data on which to base its decision.

Last week, the BoE released figures which showed borrowing by British consumers jumped in November by the biggest amount in eight years – buoyed by low interest rates and low employment.

Halifax, the UK's biggest mortgage lender, said on Tuesday that house prices jumped 2.9 percent in December, compared to a 2 percent rise in November. The December increase was the biggest monthly rise in more than two years, Halifax said.

On an annual basis, it said house prices were up 15.5 percent – the strongest rate since January 2000.

"Despite the terrible events of September 11 and the dramatic slowdown in the world economy the housing market has shown remarkable resilience," said Gary Styles, head of group economics at Halifax, told Reuters.

Last week, the Confederation of British Industry reported that UK retailers enjoyed the best start to the Christmas shopping period in 14 years.

On Tuesday, UK retailer Electronics Boutique reported a 47 percent jump in same store sales in the five weeks to December 29, while clothing retailer Next said its same store sales grew 9 percent for the 23-week period ended January 5.

"We beat our expectations in the run up to Christmas and this time last year we had particularly high stock levels leading to a bigger clearance," Next chief executive Simon Wolfson told Reuters.

"Certainly, the growth rate we've been seeing is well ahead of our long term growth rate for like-for-like sales, which is between 3 to 5 percent," he said.