Bank of England Keeps Benchmark Interest Rate at 5.5%

Bank of England Keeps Benchmark Interest Rate at 5.5%

Jan. 10 (Bloomberg) -- The Bank of England kept its benchmark interest rate unchanged today as policy makers assessed the effects of last month's reduction on the economy.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, left the bank rate at 5.5 percent, as predicted by 40 of 50 economists in a Bloomberg News survey. The rest forecast a quarter-point cut.

Economists predict the Bank of England will wait until next month before lowering rates again as banks rein in lending, damping consumer spending and deepening a slowdown in the housing market. Officials are weighing those risks against inflation pressures after oil prices rose to a record.

``They don't want to take risks on inflation,'' said Stewart Robertson, an economist at Morley Fund Management in London. ``But they missed a trick here. They could have sent a supportive message in the face of a lot of gloomy news. We'll get a cut next month.''

The pound rose as high as 74.65 pence per euro after the decision. Earlier, it dropped to a record as some investors speculated the deteriorating economy would prompt the Bank of England to lower borrowing costs as soon as today.

The yield on the two-year government bond rose more than 3 basis points to 4.391 percent. Minutes of the meeting, including how each member voted, will be published on Jan. 23.

U.S. Recession

U.K. Prime Minister Gordon Brown, lagging behind opposition leader David Cameron in opinion polls, is trying to reassure voters that the economy can weather a global slowdown. Brown, who will decide in the next few weeks whether to reappoint King as governor, said yesterday that ``low interest rates'' and ``low inflation'' will keep growth on track.

Goldman Sachs Group Inc., Morgan Stanley and Merrill Lynch & Co. say the U.S. may already be in recession and recent economic reports suggest the U.K. economy is cooling.

House prices dropped in the fourth quarter for the first time in seven years and shares in Marks & Spencer Group Plc, the country's largest clothing retailer, yesterday fell the most in at least 19 years after an unexpected decline in holiday sales.

``A rate cut is important and 50 basis points clearly would be nice,'' Ian Dyson, finance director of Marks & Spencer, said in a Bloomberg Television interview yesterday. The company said conditions will remain ``tough'' throughout 2008.

The Bank of England last month joined the Federal Reserve in cutting rates in response to the global jump in credit costs sparked by the U.S. subprime mortgage slump. The Fed has already reduced its benchmark three times, taking it to 4.25 percent, with economists forecasting a further move at the end of January.

Inflation Pressure

The European Central Bank will probably keep its benchmark at a seven-year high of 4 percent today, all 59 economists in a Bloomberg News survey predict.

The Bank of England is considering rate cuts even as inflation pressures mount. Consumer prices rose 2.1 percent in November, exceeding the 2 percent target for a second month, and U.K. gasoline prices climbed to a record this week after the cost of crude oil reached $100.09 a barrel.

RWE AG's Npower business, Britain's fourth-biggest energy retailer, raised gas prices by an average 17 percent and electricity prices by 13 percent this month. The weaker pound will also make imports more expensive.

Brown this week called for wage moderation as labor unions started a round of annual pay negotiations.

`Fairly Concerned'

``If I worked at the Bank of England I would be fairly concerned about inflation,'' said Martin Weale, director of the National Institute of Economic and Social Research, a research group that advises the Treasury, in a Bloomberg Television interview. ``They probably will move in February.''

The Bank of England forecasts that inflation will return to its target next year as growth cools. Policy makers predicted in November that growth will slow to about 2 percent this year, close to the lowest since 1992, from expansion of 3 percent in 2007.

``There's a risk of recession in the U.K., but the bank can prevent it if it acts quickly,'' said Alan Clarke, an economist at BNP Paribas SA in London, who forecast a cut today. ``Inflation will go above target this year, but a sharp slowdown in the economy suggests it will come down in the medium term.''

BLOOMBERG