Bank expected to hold rudder steady

The Bank of England's monetary policy committee (MPC) is due to meet this week for the first time since the global 'credit crunch' started to take full effect.

The MPC was widely expected to increase interest rates this autumn in its bid to keep UK inflation under the cosh, but a surprise inflation fall and worldwide credit problems are set to lead members to hold rates at the current level of 5.75 per cent.

Inflation figures for July produced a surprise fall of 1.9 per cent for the Consumer Price Index (CPI), which was predicted to hit the two per cent target next year.

However, the MPC is not expected to sit on its laurels just yet as inflationary pressures still remain, especially from food. So inflation could well rise as a result of this summer's flooding and global pressures on wheat prices.

Although inflation will remain foremost in the minds of MPC members after the drying up of credit on international markets, the effect on the economy of an interest rate rise could well hang heavy.

On August 29th, the Bank of England lent £1.6 billion to Barclays from its standing facility as commercial banks shore up their inter-bank lending. Over the last year the emergency credit facility has been used 19 times, but only four loans have been over the £1 billion mark.

With the standing facility offered at one per cent over the base rate, any rise from the MPC would further hit the commercial banks and make them even more risk averse in their lending across the economy.

Meanwhile, a report by the CBI shows demand for consumer services has slowed as the effects of the five interest rate rises since August last year start to feed through into the economy.

Sales fell for travel, leisure and personal care sectors, while in consumer services only hotels, bars and restaurants recorded good growth. Meanwhile, demand for professional services, such as accountancy, law and property, has remained buoyant over the last quarter with strong business volume and value growth.

The research also showed that expectations for strong demand for consumer services over the next quarter are also depressed.

Ian McCafferty, the CBI chief economic adviser, said: "While demand for business and professional services remains strong with a fourth consecutive quarter of buoyant growth, the same cannot be said for consumer services.

"A combination of higher household borrowing costs and poor weather has put a dampener on consumers' spending over the last three months, and on travel and leisure in particular.

"Consumer services firms don't expect to expand their businesses in the coming year. Costs are expected to continue growing at a rapid rate, with less scope for firms to raise prices, which will inevitably put profit margins under greater strain."