Bank of England opts to freeze interest rates as US closes in on cut

PRESSURE for a cut in interest rates is set to intensify after Bank of England policymakers sat on their hands yesterday, leaving borrowing costs unchanged at 5.5 per cent.

Business leaders expressed disappointment at the decision not to repeat December's quarter-point cut, amid signs of a cooling economy.

However, members of the central bank's monetary policy committee will have had to weigh the threat of higher inflation from soaring oil prices and rising food costs.

Meanwhile, comments last night from US Federal Reserve chairman Ben Bernanke hinted at further interest rate cuts across the Atlantic.

The dollar fell sharply after Bernanke said the central bank was ready to take "substantive additional action" to shore up a slowing economy. His remarks came after leading investment banks warned that the US was heading towards a recession.

Some economists believe the Fed will cut rates by a bold half percentage point later this month.

Reacting to the UK rate freeze, Liz Cameron, director of Scottish Chambers of Commerce, said: "It is disappointing that the Bank of England have failed to take this opportunity to deliver a shot in the arm to the UK economy."

"Here in Scotland, we have already had news this week of a sharp downturn in our manufacturing exports and we cannot afford any further decline in our competitive position this year."

The British Retail Consortium (BRC) also criticised the move, saying the Bank's decision to leave interest rates unchanged "adds further pressure to customer-facing businesses".

BRC director general Kevin Hawkins added: "While we appreciate the decision was finely balanced, given the inflationary pressures facing the economy, 2008 is going to be tough for all customer-facing businesses."

In contrast, Richard Dingwall-Smith, chief economist at Scottish Widows Investment Partnership, said: "This was expected by most economists, albeit markets had talked themselves into a belief that a January cut was a strong possibility."

Andrew McLaughlin, group chief economist at Royal Bank of Scotland, added: "With money markets returning towards some semblance of normality and sterling weakening sharply, the MPC was never likely to opt for back-to-back rate cuts. Nevertheless, with real economy data breaking to the downside, a rate cut is on the cards for February."

TRADE GAP WORSENS TO £7.4BN

BRITAIN'S goods trade deficit widened to £7.4 billion in November while the deficit in oil climbed to £663 million, its highest in more than two years.

The figures – released just before the MPC's no-change rate decision – also showed a worrying climb in import inflation, a trend that is likely to worsen given the pound's recent fall. Import prices rose 0.8 per cent on a quarterly basis. Sterling slipped further against the euro yesterday to 1.3275 against 1.3347 previously.