Interest rates set to stay at 5%

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UK interest rates are expected to be held at 5% on Thursday following the latest meeting of the Bank of England.

Analysts say the Bank is likely to want further evidence on whether two interest rate rises last year were enough to keep a lid on inflation.

However, the Bank is strongly tipped to increase rates from 5% to 5.25% in February or March.

Analysts believe that 2007 could see one or two such rises - though a rate cut may be possible later in the year.

Robust

UK consumer price inflation accelerated to 2.7% in November, its highest level in nearly a decade.

The rate was also well above the government's target of 2%, giving ammunition to those who argue higher borrowing costs are needed to cool inflation.

It's not inconceivable that later in the year...we could be talking about when we are going to get the next rate cut John HawksworthPricewaterhouseCoopers

The housing market also remains robust - despite the Halifax reporting a drop in prices during December.

Recent figures from the British Retail Consortium suggested that spending on the High Street was solid in December.

However, the Bank of England governor, Mervyn King, has previously said that he believes that it is some time after the festive period before the true strength of Christmas spending can be gauged.

"A rise this month would be highly unexpected and a big surprise," said PricewaterhouseCoopers UK economist John Hawksworth.

"A February rise is much more likely but it still depends on the economic data we see between now and then."

Looking ahead to 2007 he added: "I don't expect we will see more than one or two quarter of a percentage point rises.

"And it's not inconceivable that later in the year, if there's a slowing UK economy, perhaps with a US downturn, then we could be talking about when we are going to get the next rate cut."

Rate freeze 'odds on'

Roger Bootle, UK economic adviser to Deloitte, said there was an "outside chance" of a rise in January.

"One thing that will be on the minds of the committee is the January pay round and I can see the hawks in there saying that perhaps something should be done in January, rather than February to take that into account."

If this did not materialise, a rate rise in February, to coincide with the next inflation report, was likely, he said.

Mr Bootle added that he did not expect rates to climb beyond 5.5% in 2007.

Global Insight economist Howard Archer said that a rates hold for January was "odds-on"

But he added the Bank would raise rates to 5.25% in the first quarter of 2007 "as a precautionary measure".

"A move in February is clearly a very real possibility, although it could well be delayed until March. Momentum appears to be gathering for one," he said.

The Bank's Monetary Policy Committee raised the cost of borrowing to 5% in November, its highest level in five years.

In December, the committee kept rates on hold, with minutes of the meeting showing that the decision was unanimous.