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Interest rates unchanged for spring

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23/03/2006

Interest rates have been kept on hold at 4.5% for the seventh month running, with no change likely in April. Paula John reports

The 9-strong Monetary Policy Committee (MPC) voted 8-1 to maintain rates, on the back of continued strength in the housing market offset by lower consumer spending on the high street.

Stephen Nickell was the only MPC member to vote for reducing rates to 4.25%.

The MPC said indicators suggested that gross domestic product for the first three months of the year was increasing above its long-term potential, with business services notably strong.

Committee members said the slightly stronger housing market was being tempered by lower consumer spending, due in part to higher taxes and higher gas prices.

Analyst Rob Carnell from ING said: “We, however, continue to view the recent upturn in housing as a temporary phenomenon.”

“With housing unlikely to provide an offset to the other disinflationary influences over the course of the year, we continue to regard the most probable next direction for UK rates as down, not up,” said Mr Carnell.

However, the MPC is to lose its only current ‘dove’ in May, when Stephen Nickell’s term comes to an end.

He will be replaced by US academic David Blanchflower in June. Blanchflower, like Nickell, is an expert on labour markets. But whether he will take a hawkish or dovish approach to the UK economy remains to be seen.

The MPC is also to lose rate setter Richard Lambert, with immediate effect. Lambert has accepted the position of Director General of the Confederation of British Industry (CBI), a role that would represent a conflict of interest.

The CBI has consistently called for lower interest rates in order to boost the economy but the central bank has not budged since its last quarter point rate cut in August last year.

Lambert’s replacement will be duly announced by the Treasury.

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