Rates cut by MPC seen as unlikely

City pundits expect the Bank of England to keep interest rates steady at 5.75% when it announces its latest policy decision today despite recent turbulence in the financial markets sparked by the US sub-prime mortgage crisis, record oil prices and a credit squeeze.

Fifty-five of the 60 economists recently polled by Reuters said they expect the Bank's Monetary Policy Committee will not follow the path taken by the Federal Reserve, which reduced the cost of borrowing at its past two meetings in a move to keep the US economy from tipping into recession.

Some investors and analysts had feared the UK economy would be hit by a sharp slowdown following the steep sell-off in the financial markets during August and September and a slump in confidence stemming from the Northern Rock debacle, but the knock-on effects of these events do not seem to have fully emerged.

Instead, the MPC will be examining a series of stronger-than-expected economic indicators at its two days of deliberations that end at noon today.

City economists said MPC policy-makers will want a bit more time to assess the impact of the Northern Rock saga, rising oil prices and the credit squeeze before deciding on the direction of interest rates.

Many Square Milers believe the Bank may decide to reduce the cost of credit at its December meeting.

The views of anti-inflation hardliners will be strengthened this week by data that showed a surprise jump in retail sales volume during September, according to the latest Office for National Statistics figures, even though a CBI survey last week indicated the pace of sales growth slackening.

MPC hawks can also point to yesterday's BRC-Nielsen Shop Price Index for October that showed prices were 1.1% higher than at the same time a year ago. This is the highest year-on-year rise in shop prices so far this year and caused by the continued inflationary cost pressures in food filtering through to overall prices, which showed a year-on-year rise of 3.7%, up from 2.7% in September, which is the highest rate of inflation for food since May 2007, when it was 3.8%.

Shop prices in Scotland rose in October for the fourth consecutive month, accelerating to an annual rate of 1.1%, from 0.7% in September.

And despite signs of weakening activity and business confidence among manufacturers, figures from Nationwide showed a 1.1% rise in house prices during October - a "surprisingly strong increase", according to the building society.

This flies in the face of concerns over a cooling housing market after five base rate increases since August last year.

Commenting on the recent figures, Investec chief economist Philip Shaw said: "Recent figures have been stronger than expected, implying that if the economy is slowing down, it is doing so from a position of some strength. Some degree of resilience in the housing market may remain.

"We now believe that the solid momentum of the economy will probably persuade the MPC to keep rates on hold."

Meanwhile, tremors from the Northern Rock affair continued to be felt in the City.

The Financial Services Authority, responsible for policing UK banks, said a panic response to the near-collapse of Northern Rock would damage the UK regulatory system. The FSA warned that the full lessons from the crisis would not be clear until 2008.

The financial services watchdog is facing the biggest test since it was set up seven years ago, accused along with other regulators of failing to do enough to prevent the first run on a British bank in more than a century.

Thomas Huertas, head of wholesale and institutional markets at the FSA, said a first review of supervision in the wake of the troubles at the UK's fifth-largest mortgage lender would be complete early next year.

"One has to be cautious about rushing off after turbulence or a crisis to suggest legislative change," he said.

The government has already brought in some changes since Northern Rock was forced in mid-September to turn to the Bank of England for emergency cash, including introducing a guarantee to back up retail deposits in UK banks.

But Huertas said it was too soon to decide on changes to the structure regulating banks.