UK keeps key interest rate unchanged

By Brian Swint  |   2008-7-11  |     NEWSPAPER EDITION

THE Bank of England kept the benchmark interest rate unchanged yesterday as policy makers weighed the threat of Britain's first recession in a generation against the risk of accelerating inflation.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, left the bank rate at 5 percent, dismissing calls from unions and executives to lower it for the fourth time since December.

"In the face of ongoing inflation pressures, the Bank of England is caught between a rock and a hard place," Matthew Sharratt, an economist at Bank of America Corp in London, said before the decision. "Until the outlook becomes clearer, they'll probably leave rates on hold."

House prices dropped the most since 1993 in June. Barratt Developments Plc yesterday became the fifth home builder this month to announce job cuts, and surveys show the rest of the economy is now contracting. With inflation accelerating above the government's 3-percent upper limit, King has said that Britons should brace themselves for a squeeze in living standards.

Inflation reached 3.3 percent in May, exceeding the bank's 2-percent target by more than a percentage point for only the second time in a decade, and King said on June 26 that it may reach 4 percent this year, Bloomberg News said. At the same time, Lehman Brothers Holdings Inc says the economy is in recession.

House prices fell an annual 6.1 percent in the three months through June, the most in 15 years, mortgage lender HBOS Plc said yesterday.

Home builders Barratt Developments, Redrow Plc, Bovis Homes Group Plc, Persimmon Plc, and Taylor Wimpey Plc have announced more than 4,000 job cuts since the start of the month.

"The housing market is tumbling and credit is tight," Sarah Hewin, an economist at Standard Chartered Group in London, said. "The pressures for a rate cut are starting to grow."