Bank of England Maintains Interest Rates at 4.0%

The Bank of England's decision ushered in the longest period of stable rates in more than four decades with the decision widely predicted - all 38 private sector economists polled by the Reuters news agency had expected rates to stay on hold. Futures markets show the next move is expected to be a rise in the middle of next year.

This is now the longest period that rates have been unchanged since 1958-60, and this year is now the first calendar year since 1959 when rates have remained steady.

After the last two MPC meetings economists said the committee was moving towards a rate cut - three of the nine members voted for a quarter-point cut in October and two retained that view last month.

However, the prospect of lower rates appeared to wane in the Bank's November inflation report, which highlighted the risk of higher inflation from public sector pay and the rise in national insurance contributions. It also made its strongest warning yet that there is a growing danger of a "sharp correction" in house prices.

A raft of evidence this week confirmed that the two-speed economy had not begun to moderate - domestic demand continues to flourish while export industries are floundering.

Nationwide, the UK's biggest building society, this week said house prices rose 25.5 per cent in November - its fastest increase for 13 years. The MPC has been given a sneak preview of November figures from the Halifax, due to be published on Friday, and in recent months the lender has recorded even greater increases than Nationwide.

Data published on Wednesday showing the retail and service sectors continue to record robust growth in the face of the global slowdown, compounded the picture of strong consumer demand.

The Confederation of British Industry's distributive trades survey showed that 42 per cent of retailers saw a rise in sales last month, while 21 per cent reported a fall, putting the 21 per cent balance well above the 13 per cent average recorded between July and September.

The Chartered Institute of Purchasing and Supply/Reuters survey on Wednesday showed the service sector expanded for the 11th consecutive month in November, although the growth rate slowed slightly.

Economists said the continued strong growth in domestic demand ruled out any chance of the MPC responding to manufacturers' pleas for a rate cut. The Engineering Employers' Federation on Tuesday said the industry was contracting with the loss of lost 100,000 jobs this year and that it expected job losses to continue next year.

However, a half-point cut is likely in the eurozone, where the European Central Bank is scheduled to announce the results of rate-setting meeting early on Thursday afternoon.

Wim Duisenberg, ECB president, on Tuesday appeared to confirm expectations of a cut in response to flagging eurozone growth when he warned the European parliament that "downside risks to economic growth have not vanished".