Bank of England May Keep Rate at 5% After Inflation Accelerated

By Brian Swint

Sept. 4 (Bloomberg) -- The Bank of England will keep its benchmark interest rate unchanged today as the fastest inflation in more than a decade makes it harder for policy makers to respond to the risk of a recession, a survey of economists showed.

Governor Mervyn King's nine-member Monetary Policy Committee will leave its key rate at 5 percent at 12 p.m. in London today, according to all 61 economists in a Bloomberg News survey.

The decision would leave Prime Minister Gordon Brown to his own devices for now after he unveiled proposals this week to prop up the economy and revive his flagging popularity. While King himself has indicated a recession is possible, his room for action is constrained by an inflation rate that's more than double the bank's 2 percent target and likely to accelerate further.

``The bank would be keen to respond to the weakness in the economy, but it can't,'' said Dominic White, an economist at ABN Amro Holding NV in London. ``The government's measures may provide a small incentive to buy houses now rather than in a few months, but the economy could still feel rather grim. Brown will have to grin and bear it.''

Support for Brown's ruling Labour Party has slumped in the past year as the global credit squeeze dragged down the economy.

Brown has responded by trying to help the housing market as prices fall the most since the last recession in the early 1990s. The government this week suspended the tax on home purchases of less than 175,000 pounds ($311,000) and said it plans a package of measures to help consumers cope with the credit crunch.

Refusing to Cut

King's Bank of England is, for now, refusing to add to its three rate cuts since December after surging oil and food prices pushed inflation to 4.4 percent in July. The bank's August forecasts showed inflation could accelerate to 5 percent.

Seven of the bank's rate setters opted to keep the benchmark rate at 5 percent last month, with David Blanchflower voting for a cut and Timothy Besley saying rates should be increased.

``You can take your eye off this hump in inflation only when activity slows enough,'' said Amit Kara, an economist at UBS AG in London. ``Inflation expectations that feed through into wages are still the big concern.''

At the same time, economists say opposition to rate cuts will wane in coming months as the slowdown and falling energy costs ease inflation pressures. Growth ground to a halt in the second quarter, ending the U.K.'s longest stretch of expansion in more than a century.

The pound dropped to a record against the euro on Sept. 2 and has fallen 12 percent against the dollar since July 12.

Oil prices have dropped 26 percent since touching a record $147 a barrel on July 11 and the central bank said in minutes of the August meeting that the inflation outlook may have ``eased a little.''

More than half of the 51 economists in a Bloomberg News survey from Aug. 29 said the benchmark interest rate will fall by a quarter-point to 4.75 percent by the end of the year.

``The MPC cannot ignore the mounting threats of falling U.K. house prices and worsening pressures on the global banking system,'' said David Kern, economic advisor to the British Chambers of Commerce today. ``The MPC must start cutting rates in October or November, as soon as inflation peaks.''

To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.net;