BoE keeps rates on hold

The Bank of England has left interest rates on hold since November

LONDON, England -- The Bank of England left interest rates unchanged on Thursday, as widely expected, amid concerns over a weak economic recovery and continuing volatility in stock markets.

The BoE's key lending rate has remained at 4 percent -- the lowest level for 38 years -- since November last year. The bank cut borrowing costs seven times in 2001 in an effort to ease the impact of the global economic slowdown.

But with few signs of a sustained recovery, most economists believe the BoE had little choice but to the leave rates on hold for the time being.

MORE STORIES • UK shoppers tighten their belts  • Central banks keep rates on hold  • UK economy picks up speed

The UK economy, Europe's second largest after Germany, grew by just 0.6 percent in the second quarter after almost grinding to a halt in the fourth quarter of 2001 and the first quarter of this year.

Retail sales edged higher in July for the first time in three months, but at a slower pace than expected.

Seasonally adjusted sales volume rose 0.3 percent last month, bringing the year-on-year growth rate to 4.5 percent. Economists had expected a month-on-month rise of 0.6 percent and an annual increase of 4.7 percent.

The rate of inflation -- a key barometer of the economy -- is also running well below the government's target of 2.5 percent for 2002.

Sky rocketing house prices -- which had been a major concern to monetary policymakers -- appear to slowing as well. A monthly survey by UK bank Halifax showed prices rose by just 0.2 percent in August, the weakest pace in 10 months.

"Consumer spending has started to falter... but don't forget that this is exactly what the Bank of England wants to see. Indeed, it has warned in the past that it would hike rates if consumer spending did not fall autonomously. Hence, it is hard to find any justification for lower rates right now," Bear Stearns said in an investment note.

However, the UK's economy is still outpacing most of the other major industrialised countries.

In August, the manufacturing sector rebounded after contracting in July. By comparison, output and new orders nearly ground to a halt in the 12-nation eurozone as customers cut back due to concern over the faltering economy.

The BoE's decision comes one week before the European Central Bank meets to discuss its lending rates.

The ECB and BoE usually announce their rate decisions on the same day each month. However, because of a summer break, the ECB has rescheduled its monetary policy meeting for September 12.

The ECB is also expected to leave it key rate unchanged at 3.25 percent.