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BoE holds interest rates, analysts see eventual cut

LONDON - The Bank of England held interest rates at 5.0 percent on Thursday as policymakers tussle with slower economic growth and surging inflation, but analysts say rates will have to fall eventually.

Markets showed little reaction to the decision, which had been widely expected, and are still betting that interest rates may yet rise this year because of sustained evidence of simmering inflationary pressures.

Inflation is at its highest -- 3.3 percent -- since the BoE won the power to set rates in 1997, making it hard to cut borrowing costs even though the housing market is weakening sharply and surveys point to a shrinking economy.

"We still think the next move will be down," said Vicky Redwood, an economist at Capital Economics. "It might not be for a few months yet, although if the activity data continues to weaken sharply as it has done in recent weeks then we might not have to wait too long."

The latest gloomy reading on the flagging housing market came on Thursday from Britain's biggest mortgage lender Halifax, showing house prices fell at a record annual pace in June. Prices are now nearly 10 percent below the peak hit last August.

Despite obvious signs of a cooling economy, some policymakers did consider raising rates at last month's meeting to counter the inflation threat. The BoE has said it would not be surprised to see inflation spike above 4 percent this year.

The BoE is charged with keeping inflation at a 2 percent target, not to manage economic growth.

The central bank will be hoping that a slowing economy can help to tame price pressures eventually. But there is also a growing risk of recession, and that could drag inflation too low.

By keeping rates on hold this month, the BoE is buying itself a little more time to see what interest rate path is required to bring inflation back to target over the medium term.

However, the minutes to this week's decision -- due on July 23 -- could show a split among policymakers.

Arch dove David Blanchflower is unlikely to have dropped his call for lower interest rates but there is also plenty on the inflation front for hawks such as Andrew Sentance and Timothy Besley to argue that rates need to stay on hold for some time.