The Bank of England left its benchmark interest rate unchanged at 4 percent for a second month after a recovery in manufacturing faltered and the pound strengthened. The U.K. central bank has raised its repurchase rate by two quarter-point increases since November. Twenty-seven of the 45 economists surveyed by Bloomberg before the decision expected no change. Most of the rest forecast an increase for May, when the bank issues its quarterly inflation forecast. Bank of England Governor Mervyn King has said policy makers intend to raise rates ``gradually.'' Gains in the pound, which reached a 14-month high against the euro yesterday, have hurt exporters, and manufacturing output has declined, government figures showed Monday.
``This leaves us on track for a rise in May,'' said Ross Walker, an economist at Royal Bank of Scotland Group Plc, who correctly predicted today's rate decision. ``It's consistent with their gradualist approach.'' The pound dropped against the euro and the dollar after the rate decision. Interest rate futures fell with the yield of the three-month contract due in June at 4.55 percent at 12:15 p.m. from 4.60 percent immediately before the bank's announcement. Britain's economy grew 2.2 percent last year, the most since 2000, exceeding Chancellor of the Exchequer Gordon Brown's forecast of 2.1 percent. That was quicker than the 0.4 percent growth in the euro region, where Germany's economy shrank. Growth touched 3.1 percent in the U.S. and 2.7 percent in Japan.
Crimping Exports
A rise in borrowing costs would have exacerbated the differential between Britain and other major economies. The U.K. has the highest interest rates in the Group of Seven industrial nations. That gap has already contributed to a strengthening in the pound which King said last month is hurting exporters. The pound has risen 4.4 percent against a basket of currencies weighted according to U.K. trade patterns since the Bank of England became the first of the world's four biggest central banks to start raising rates in November. The European Central Bank left its key rate at 2 percent last week. The U.S. Federal Reserve has left its benchmark lending rate at a 45-year low of 1 percent since June, while the Bank of Japan has a policy of zero interest rates. Other central banks are lowering rates. The Bank of Canada cut its key rate a quarter percentage point to 2.25 percent last month, and Sweden's Riksbank last week reduced borrowing costs by a half point to 2 percent, the lowest in a century as inflation waned and companies such as phone-equipment maker Ericsson AB cut jobs.
Production Sputtering
A recovery in manufacturing is sputtering, with output unexpectedly falling 0.6 percent in February. Lobby groups praised the bank's decision, saying higher rates would add to the pound's gains and boost the price of British exports. ``Today's decision by the MPC is the preferred option for business,'' said David Frost, director general of the British Chambers of Commerce. This year may be ``the U.K.'s first year of above-trend growth since 2000, but this growth is not enjoyed by all sectors.'' Consumer prices rose 1.3 percent in February from a year ago, below the central bank's 2 percent goal. The bank's projections show it rising through the target level in two years' time.
Borrowing Binge
Still, the central bank may want to curb consumer spending as house prices, which have spurred a borrowing binge, accelerated. Policy makers started raising rates from a 48-year low as consumers took on a record 956 billion pounds in debt ($1.8 trillion) through February, pushing up house prices and threatening to quicken inflation. U.K. home values, underpinned by falling unemployment, grew 18.5 percent in the first quarter, the fastest annual pace in six months, according to HBOS, the nation's largest mortgage lender. Evidence in the past weeks suggests consumers' willingness to borrow and spending is equally buoyant. Mortgage equity withdrawal climbed to a record in the fourth quarter, figures last week showed. Britons also took advantage of financing deals to purchase more cars than ever before in the first quarter.
``The lending data and the housing market are not showing any signs of responding,'' said Andrew Clare, an economist at Legal & General Plc. ``It's clear now that it's not going to stop without action'' from the Bank of England.
Lowest Unemployment
Britain's unemployment rate at 4.8 percent is the lowest in the G-7 countries. It's below the rates of 5 percent in Japan, 5.7 percent in the U.S., and in Europe, 9.2 percent in Germany and 9.5 percent in France. U.K. earnings growth accelerated to 4.4 percent, the fastest pace since September 2001, in the quarter through January. The central bank has said increases above 4.5 may threaten its inflation objectives///www.bloomberg.com