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Bank of England predicted to hold rates

Bank of England predicted to hold rates

The Bank of England looks almost certain to hold UK interest rates at 4.5 percent this week as it waits for a clearer picture of Christmas spending and reassurance that workers are not securing inflation-busting pay deals.

All 45 analysts polled by Reuters last week said the central bank's Monetary Policy Committee would keep borrowing costs steady for a fifth month when its first meeting of the year concludes at 1200 local time today.

"An improvement in the outlook for the services sector, a stronger housing market and expectations of a reasonable Christmas for retailers should be enough to keep the BoE on hold," said George Buckley, chief UK economist at Deutsche Bank.

Most analysts predict the BoE will eventually be proven too optimistic on Britain's economic growth prospects, and say that inflation will continue to slow, making room for at least one rate cut this year on top of last August's quarter-point trim.

But many who thought borrowing costs would fall as soon as February have been dissuaded by reports of stronger than expected activity in Britain's vast services sector and recent signs that household spending is accelerating.

Industry surveys signalled that retail sales bounced running into Christmas, while there were upbeat trading updates from big names such as clothing shop Marks & Spencer, department store John Lewis and photography shop Jessops Plc.

"We think the BoE will have room to cushion the expected moderation in consumer spending by shaving interest rates gently in 2006," said Lorenzo Codogno, economist at Bank of America.

"By the February meeting, however, the MPC may not have sufficient evidence of weakness on the consumer side to back another cut in rates."

Similarly, financial markets have markedly scaled back their rate cut expectations as signs of a sales pick-up flowed in.

BoE Governor Mervyn King, who had predicted this Christmas would not see boom sales, has repeatedly emphasised the dangers of trying to assess the key retail season too early.

That's not all policymakers will be waiting for.

After high energy prices pushed inflation above the BoE's 2.0 percent target for five months running last year, MPC members will want to know for sure workers are not getting bumper pay deals in the new year wage round to compensate.

Still, one MPC member, Stephen Nickell, was already predicting in December that inflation could undershoot its target and he voted for a rate cut - against the other eight.

Other members fanned rate cut expectations by saying at the same meeting, according to minutes published later, that risks to the BoE's growth forecast were weighted to the downside.