Bank dampens 2006 interest cut hopes

The Bank of England has thrown a dampener on hopes of a cut in interest rates in the coming months, hinting that the base rate will stay unchanged at 4.5 per cent over 2006.

The Bank’s quarterly inflation report has suggested that it sees little to encourage the prospect of a base rate cut.

A recent fall in the rate of inflation to below the Bank’s target level of 2.0 per cent had encouraged some to believe that a reduction in the base rate could be possible soon.

The Bank’s own figures have indicated that inflation will soon begin to rise without cheaper borrowing, however.

“Inflation is now predicted to remain close to the 2.0 per cent target over the remainder of the forecast horizon (which runs until 2009),” said Jaspreet Sehmi, economist at the cebr think tank.

“The report indicates that the Bank remains uncertain about inflation and is likely to wait for developments through the first half of this year before making any interest rate moves,” she added.

Others have described the Bank’s report as “over optimistic” however, saying that muted consumer spending will undercut inflation, leading to interest rate cuts of 0.25 per cent by May.

Underlying rates of interest are one of the key deciders of the best rates of homeowner loan deals, mortgages and credit cards.

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