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Bank of England keeps interest rates unchanged at 5.75%

Thursday, September 6, 2007

The Bank of England left the benchmark interest rate unchanged at a six-year high as it focused on curbing an increase in corporate borrowing costs that may crimp economic growth. The Monetary Policy Committee, led by Governor Mervyn King, kept the bank rate at 5.75%. The bank will release the minutes of the decision on Sept. 19.

"There are tentative signs of a slowing in consumer spending," the bank said in a statement that accompanied its decision. "But the recent solid pace of output growth has been sustained and the margin of spare capacity appears limited. Indicators of pricing pressure remain somewhat elevated. It is too soon to tell how far the disruption in financial markets will impair the availability of credit to companies and households."

The central bank yesterday took its first steps to reduce U.K. money-market rates, which have climbed to the highest since 1998, following the collapse of the U.S. subprime mortgage market. The turmoil has clouded the economic outlook less than a month after the bank signaled that five rate increases in the past year may not be enough to contain inflation. "They won't rush to raise rates, and they won't hurry to cut rates either," Geoffrey Dicks, chief U.K. economist at Royal Bank of Scotland Group Plc in London, said before the decision. "They're trying to work out where this turbulence leaves us." The bank said inflation may remain around, or a little below its 2% target for the next few months and that "pay pressures remain muted." Economic growth accelerated to 0.8% in the second quarter, up from 0.7% in the previous three months. Manufacturing expansion reached a three-year high last month and services growth unexpectedly quickened, surveys of purchasing managers showed this week. "Financial markets are becoming more of an issue for central banks right around the globe," said James Shugg, an economist at Westpac Banking Corp. in London. "Longer-term concerns about inflation haven't changed, but in the shorter term, there are downside risks to growth from the turmoil."

The Bank of England yesterday offered extra money next week to reduce "unusually high" overnight interest rates. The European Central Bank today loaned an additional 42.25 billion euros ($ 57.7 billion) to banks to help reduce the cost of credit. The shortage of funds in money markets is persisting even after the ECB, the Federal Reserve and other central banks added more than $ 400 billion to the financial system since Aug. 9.

The Australian central bank said today it will buy debt backed by home loans. Policy makers there and in Indonesia left key interest rates unchanged this week. The Bank of Canada made no change to its key rate, now 4.5%, yesterday. The ECB will probably keep its benchmark rate at 4% today, according to a survey of 56 economists. The U.S. Federal Reserve left its rate at 5.25% on Aug. 7.

Commercial banks have been reluctant to lend to each other because of concern about borrowers' vulnerability to securities backed by U.S. subprime mortgages, or home loans aimed at people with poor credit histories.

The gap between the U.K. benchmark rate and the three-month money-market rate, known as the London interbank offered rate, was the biggest in 20 years after yesterday's fixing. The rate was at 6.8%, compared with 6.03% on July 27. Policy makers said last month they had "no firm view on whether rates needed to rise further," while their forecasts released Aug. 8 suggested the key rate needs to reach 6% to get inflation to the 2% target in two years.

"Recent financial market developments are likely to have boosted the bank's willingness to monitor previous rate increases before making another move," said Lena Komileva, an economist at Tullet Prebon in London. "They're going to remain concerned about pipeline inflation pressures."

Posted by FR at 7:15 PM  

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