UK leaves rates on hold

September 6, 2001 Posted: 1058 GMT

LONDON (CNN) -- The Bank of England on Thursday left UK interest rates on hold, as expected, even as the world's fourth-largest economy slows.

The Bank has trimmed rates four times this year in quarter-point steps to 5 percent as the global economic slowdown pushed companies to cut jobs in the UK and internationally.

British Airways, Europe's biggest airline, this week became the latest UK blue chip company to wield the cost-cutting axe, slashing 1,800 jobs this year as it battles against falling profitability.

But consumer spending growth shows no sign of abating, confounding economists and members of the Bank's rate setting committee, who cut rates last month as an insurance against deteriorating markets.

"Manufacturing is in a hole but the housing market is pretty buoyant," Michael Dicks, an economist at Lehman Brothers, told CNN.

The latest figures on consumer spending showed sales grew at their fastest annual pace in five years in August and house prices surged.

Consumer confidence is high as unemployment remains at a 26-year low. Average wages grew 4.8 percent in the year to June 30.

But a survey on the services sector, the powerhouse of the UK economy, showed only meagre growth in August as the downturn in manufacturing industry began to make itself felt more widely.

Britain's economy is set to grow around 2.0 percent this year, according to the Bank of England, below the country's average annual growth rate over the past four decades, which is around 2.3 percent.

The current forecast by theTreasury – the UK government's finance ministry – is more optimistic that estimates from the Bank and most private-sector forecasters, pitching for a growth of between 2.25 and 2.75 percent for 2001

In contrast to the general picture of slowing activity, house prices rose 10.9 percent in the year to August, the fastest pace for 15 months, the UK's biggest lender Halifax has said. Consumers have been buoyed by mortgage rates that are at a 40-year low.

"The buoyancy of both the housing and mortgage markets indicates that the marked slowdown in the world economy and the recession in the UK manufacturing sector have so far had little adverse impact on consumer sentiment," said Martin Ellis, Halifax's group economist.

The European Central Bank, which sets monetary policy for the 12-nation euro zone, last week trimmed rates for the second time this year to 4.25 percent to try to shore up economic growth. The ECB had been reluctant to cut rates as inflation hit a peak of 3.4 percent in May, well above its target of 2 percent.

The Bank of England has had more room to reduce rates because UK inflation has held below its target of 2.5 percent, falling to 2.2 percent in July from 2.5 percent in June.

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