BoE holds rates at 5.5% on inflation fears, signs of recovery (MarketWatch) (10-01-2008)

LONDON (MarketWatch) -- The key interest rate remained unchanged at 5.5% Thursday. So says the Bank of England as it sees signs of improvement in the credit markets and continuing inflation fears against a weak Christmas trading period for the retail sector.

Economists had been expecting a rate cut, which they now believe may materialize in February, when the bank publishes its updated forecasts for economic growth and inflation.

U,.K. inflation is currently running at 2.1%, virtually in line with the government's 2% target rate, but the bank has repeatedly warned that inflation risks remain as energy and food prices have risen.

Recent weakness in sterling, which has fallen back below the key $2 level, could also add to inflation worries by increasing import prices.

Credit market worries also appear to have receded in the last few weeks, with inter-bank lending rates falling to their lowest level since the credit crisis began in August.

Arguing in favor of an immediate cut was a particularly poor Christmas period for U.K. retailers.

Most notably, Marks & Spencer saw its shares tumble around 20% on Wednesday after reporting its worst quarterly performance in over two years.

Other data in the run up to the decision were mixed. The latest reading of the services-sector purchasing managers' index was stronger than expected. And a study by HBOS division Halifax found house prices rose a surprise 1.3% in December, though annual growth was just 5.2%.

Also Thursday the European Central Bank is expected to hold its key rate steady at 4%, potentially setting the stage for a rate hike later in the year with inflation in the euro-zone running significantly above target.

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