Bank of England Keeps Interest Rate at Six-Year High

Oct. 4 (Bloomberg) -- The Bank of England kept its benchmark interest rate unchanged at a six-year high as policy makers assessed the effect on the economy of higher credit costs and a run on Northern Rock Plc.

The Monetary Policy Committee, led by Governor Mervyn King, left the bank rate at 5.75 percent, matching the forecast of all except one of the 60 economists surveyed by Bloomberg News.

The decision follows panic among depositors at Northern Rock after money-market rates jumped, leaving the bank unable to fund its business. The run on the lender, the first in more than a century, has clouded the outlook for economic growth and inflation, and sparked criticism of the way the central bank handled the seizing-up of credit over the past two months.

``The economy is under the pressure of the credit crunch,'' Charles Goodhart, a former Bank of England policy maker, said in an interview. ``It's very difficult to see what exactly is happening in the economy. The MPC rather likes to have a full inflation report and assess the situation in greater depth. I would expect a cut at the November meeting.''

The Bank of England's benchmark rate is the highest among the Group of Seven industrialized nations. The Fed reduced its rate by half a percentage point to 4.75 percent on Sept. 18, saying tougher credit standards, caused by the collapse of the U.S. subprime mortgage market, may hurt growth. The European Central Bank kept its key rate at 4 percent today.

Pound Rises

The pound rose as much as 0.3 percent to $2.0365 after the decision and traded at $2.0351 as of 12:45 p.m. in London. The currency reached a 26-year high of $2.0654 on July 24.

Today's decision may precede a U.K. general election by little more than a month. Prime Minister Gordon Brown is considering whether to schedule a vote by the end of the year to take advantage of his lead in opinion polls.

U.K. house prices, which have surged 18 percent in the past two years, fell for the first time in nine months in September, a report from HBOS Plc showed today.

Northern Rock, the U.K.'s fifth-biggest mortgage lender, last month asked the central bank for a loan to help it weather the credit slump, and only a government guarantee ended the subsequent run on deposits on Sept. 17. Former policy maker Richard Lambert, who is now the country's chief business lobbyist, said Sept. 26 that ``outside movies, a run on a bank is something that happens in a banana republic.''

King's Policy

King drew criticism for not doing enough to help the banking industry, before he abandoned his opposition on Sept. 19 and loosened the central bank's lending standards. The Bank of England hasn't reported any further requests for help. It allocated 25 percent of bids from banks in a one-week loan sale of 27.6 billion pounds ($56 billion) after today's decision.

U.K. policy makers said in minutes of the Sept. 6 decision that inflation risks had ``probably receded,'' even though the impact of financial market turmoil on the economy was ``still very unclear.''

Shortly before the bank's decision, Goodhart said he had a ``sneaking suspicion'' that policy makers were tilted toward cutting rates today, though they would have difficulty explaining the move unless they could show inflation would remain low.

`Tighter' Conditions

``The one point nobody has taken into consideration is that the market has effectively tightened monetary policy on everybody by half a percent or more,'' Goodhart said. ``If the bank were to lower interest rates by a quarter actually more people could take out mortgages and companies trying to raise funds would find that conditions in financial markets were still somewhat tighter than they were five or six weeks ago.''

``My worry is that it may presage that the inflation figures coming in will be rather worse than they expected,'' Goodhart said.

Inflation slowed to 1.8 percent in August, the lowest level since March 2006 and below the central bank's 2 percent target for a second month. The bank will publish minutes of today's decision on Oct. 17.

``Not only do we not know how much of an impact the crunch is having on the economy, we also don't know how much higher interest rates have been passed through,'' said George Buckley, chief U.K. economist at Deutsche Bank AG, after the decision.

A survey of U.K. banks shows they are poised to reduce the supply of credit to companies ``significantly,'' the Bank of England said Sept. 26. Borrowing costs have also risen after five rate increases by the central bank over the past year.

Money Markets

Money-market rates have eased over the past week. The three-month London interbank offered rate, or Libor, for pounds fell to 6.24 percent yesterday, the lowest since markets seized up on Aug. 9. The rate touched an eight-year high of 6.9 percent on Sept. 11.

The U.K. economy grew 3.1 percent in the second quarter from a year earlier, faster than previously estimated, a government report showed on Sept. 26. The economy will expand 2.9 percent in 2007, the most in three years, the International Monetary Fund predicted July 25.

The bank may still face inflation pressures from the pace of economic growth. Factory-gate prices rose the most since at least 1999 in September, the Chartered Institute of Purchasing and Supply and Royal Bank of Scotland Group Plc said Oct. 1. Their service industries survey yesterday showed prices increased the most in four months.

Retail Recovery

Tesco Plc, the country's biggest retailer, said Oct. 2 first-half profit rose 19 percent and sales strengthened ``significantly'' in August after record rainfall in June and July. Philip Green, the billionaire owner of U.K. department- store chain Bhs Group Ltd., said yesterday sales of clothing recovered in the past six weeks.

Thirty out of 46 economists predict at least a quarter point reduction in the benchmark rate by the bank's decision in March. Some are speculating the Bank of England may have to reduce rates as early as next month.

``The housing market is slowing, and consumer spending is likely to weaken,'' Martin Ellis, chief economist at HBOS Plc, said in an interview. ``There will be a cut before long, possibly in November.''