The Bank of England's decision to keep interest rates on hold at five per cent was broadly welcomed in the Midlands yesterday – as further signs of a booming housing market raised the prospect of a hike next year.
The Bank’s Monetary Policy Committee (MPC) left the cost of borrowing unchanged after increases in August and November took rates to the current five-year high.
Yesterday's decision was seen as "a dead cert" by economists and the markets, particularly with the United States economy showing signs of weakness and consumer confidence in the UK under threat from rising taxes and household bills.
The fragile finances of the UK consumer has left the high street facing one of its toughest Christmas trading periods for quarter of a century.
But the Bank came under renewed pressure to raise rates again next year after Halifax said average house prices lifted 1.7 per cent last month to almost #188,000.
It came despite the increase in the cost of mortgages following the two recent rate rises and took the annual rate of house price inflation up to 9.6 per cent – the highest level since March 2005.
Economist Sarah Bloomfield, of the Centre for Economics and Business Research, said: "The strong rise in house prices last month will have taken most by surprise, keeping the possibility of a rate rise early next year a possibility."
And Graeme Leach, chief economist at the Institute of Directors (IoD), said: "Today’s decision was no surprise but people should not be fooled into thinking interest rates have definitely peaked.
"It is still a 50-50 call as to whether interest rates will go up again in the New Year.
"Until strong money supply growth is brought under control the risk of higher interest rates will remain."
Inflation is running above the Bank’s two per cent target at 2.4 per cent and Bank of England Governor Mervyn King has warned of "significant uncertainty about the outlook" with inflation "likely to remain volatile".
He pointed towards the buoyant housing market and wage growth, suggesting large pay increases could push inflation even higher, raising the prospect of a further hike in interest rates.
However, the Bank’s projections see inflation falling back towards two per cent over the next two years.
That view was backed on Wednesday by Chancellor Gordon Brown who said he expected inflation to be at its two per cent target by the middle of next year and remain there in 2008.
Birmingham Chamber of Commerce and Industry welcomed the decision to stick at the five per cent interest rate for December but warned against further hikes in 2007.
Policy adviser James Cooper said: "Businesses have had to cope with two interest rate rises in the space of three months during the second half of 2006 and will be glad that the MPC has provided a respite.
"Firms need stability and the Bank of England now needs to assess what effect the previous rises have had on the economy before taking further action."
Ronnie Bowker, senior partner at Ernst & Young in Birmingham said: "All is well at present, even though last month's rate increase rocked the boat slightly.
"Manufacturing output and exports reached their highest levels for nine years in November, and with today's vote for 'no change', it wouldn't be unreasonable to think that the region was set for a Happy Christmas and prosperous New Year.
"But I fear for businesses with large export portfolios, particularly with customers in the US, as the strength of the pound escalates against the dollar."
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