Bank flags long-term rates freeze

THE Bank of England today signalled that interest rates are set to remain on hold at 4% for the foreseeable future - even though plunging stock markets could hinder economic recovery.

It warned that recent stock market turmoil could dampen consumer spending and discourage investment, but the effect would be tempered by lower money market interest rates.

Deputy Governor Mervyn King said: 'The biggest impact in our change of view of the global economy and the domestic economy is a change in the outlook for both consumption and investment resulting from a change in equity prices. Overall, the outlook is for continued recovery in world demand, but at a slower pace than anticipated in the May report,' the Bank said.

In its latest quarterly Inflation Report, which sets out the Bank's vision of the British economy over the next two years, growth is expected to recover gradually as strengthening global demand and higher public spending offset a slowdown in High Street spending.

Inflation, which is currently running at a 27-year low of 1.5%, is seen remaining below the Government's 2.5% target for most of the next two years before edging up to 2.5% at the end of the forecast period. By predicting that inflation is on course to hit the 2.5% bull's eye, the Bank is signalling that there is no need to adjust monetary policy for now.

The report added that the risks associated with future share price moves were 'evenly balanced'. Risks to growth are seen as being on the downside while those to inflation are on the upside.

King said: 'The central projection in this report is for growth close to trend and inflation close to target. But the very great uncertainties, both about the outlook and the difficulty of interpreting recent data, mean that the monetary policy committee will remain alert to the need to respond to any further change in the outlook. It remains ready to take whatever action is necessary, in either direction, to meet the inflation target.'

King said it was 'simply impossible' to know how much of the 5.3% slump in manufacturing output in June was due to the extended Jubilee bank holiday and World Cup.

The report said that despite reports from the Halifax and Nationwide over the past week that house prices continue to surge, there are tentative indications that the pace may soon start to slacken.

'The bottom line is that base rates are going nowhere, either up or down, for a long time,' said Adam Cole, economist at Credit Agricole Indosuez.

Market reaction to the report was muted. Sterling was half a cent weaker at $1.5323, or 63.30p against the euro.