UK rate stays unmoved by 'disastrous outlook'

By Brian Swint  |   2008-8-8  |     NEWSPAPER EDITION

THE Bank of England kept the main interest rate unchanged for a fourth month yesterday after inflation accelerated and the economy teetered on the brink of a recession.

The Monetary Policy Committee, led by Governor Mervyn King, left the bank rate unchanged at 5 percent, the central bank said in London.

United Kingdom services, manufacturing and construction shrank in July and house prices dropped the most in a quarter-century, while King predicted inflation would soon quicken to more than double the 2-percent target, Bloomberg News reported. Policy makers split three ways last month on which direction interest rates should move, and they may have disagreed again in yesterday's decision.

"They're in a terrible position," Paul Mortimer-Lee, head of market economics at BNP Paribas SA in London, told Bloomberg Television. "They're torn between a disastrous growth outlook and a disastrous inflation outlook. In that case, they're doing nothing."

The pound stayed close to a seven-week low against the euro after the bank's decision, trading at 79.25 pence per euro as of 12:09pm yesterday in London.

The bank, which cut the benchmark rate three times since December, will publish new forecasts on Wednesday and will release minutes of yesterday's meeting, showing how each of the nine policy makers voted, a week later.

The UK's main rate is the highest in the Group of Seven countries. The United States Federal Reserve this week kept the benchmark at 2 percent. The European Central Bank raised its rate to 4.25 percent last month and will keep it at that level, all 60 economists in a Bloomberg survey predicted. The Czech central bank cut its benchmark rate to 3.5 percent yesterday.

With the British central bank standing pat, Prime Minister Gordon Brown may try to shore up the economy with tax changes to benefit consumers. Brown's popularity has plunged after 13 months in office, with his ruling Labour Party attracting 24 percent support in a BPIX Ltd poll between July 31 and August 2, compared with 47 percent for the Conservative opposition.