The Bank of England has held UK interest rates at 5.5% following its latest meeting, but analysts say a rate rise later this year remains likely….

The decision to freeze rates had been expected, to give the Bank time to assess the impact of recent rate rises.

UK rates have now been increased four times since August last year in an attempt to rein in inflation.

But with price growth still strong, many analysts expect a further rise to 5.75% before the end of the year.

Rate impact

Business groups welcomed the decision by the Bank's Monetary Policy Committee (MPC) to freeze rates.

"Whilst the door remains open for a further rise if necessary, today was not the day for tougher action," said EEF chief economist Steve Radley.

CBI chief economic adviser Ian McCafferty applauded the Bank for resisting "rushing into a rate rise that, though widely expected, may still prove unnecessary".

"Evidence is starting to emerge that the four rate rises since August are having an impact," he added.

Earlier this week, the latest survey from the British Retail Consortium recorded a drop in underlying sales during May, with recent rate rises being cited as one factor putting off shoppers.

Price pressures

However, although the Bank refrained from raising rates this month, many analysts think there is a very strong chance of rates hitting 5.75% in the near future to keep inflation under control.

While consumer price index (CPI) inflation fell from 3.1% to 2.8% in April, the measure still remains well above the government's target of 2%.

Recent economic releases have suggested business confidence is rising and have also indicated that companies are looking to raise prices.

In the housing market, while price growth has slowed, the annual rate is still hovering around the 10% mark.

A poll of analysts by the Reuters news agency earlier this week put the chances of rates hitting 5.75% this year at 80%, with a 30% chance they rise to 6%.

Temporary reprieve

"The Bank of England's decision to leave interest rates unchanged may well prove to be only a temporary reprieve," said Howard Archer, chief UK and European economist at Global Insight.

"We suspect that another 25 basis point hike to 5.75% could arrive as soon as July."

James Knightley at ING said:

"Interest rates are going higher and we suspect that they will get to 5.75% in July, based on the recent data flow and the hawkish tone to Bank of England comments."

The UK is not the only nation wrestling with the problems of inflation.

On Wednesday, the European Central Bank raised its main interest rate to 4% and also increased its inflation forecast for the eurozone this year to 2% from 1.8%.

Distortion ‘chaotic’ for purchasers

Robert Bryant-Pearson, Chief Executive of Allied Surveyors, commented:

“I welcome today’s decision to hold interest rates at 5.5%. This is a sensible decision at a time when the level of house prices in relation to earnings makes the housing market dangerously vulnerable.

“The HIPs shambles caused many houses to come onto the market where the owners were only interested in selling if they could find a house they wanted to buy: this distortion is chaotic for purchasers as the number of houses that are truly readily available for sale is as low now as it has been over the last few years. 

“The housing market has slowed considerably and during the remainder of the year I would expect to see a quieter market with limited supply matched by muted demand.

“There is wide speculation that rates are close to their peak in the current cycle, which is just as well: if rates were to increase much more, then repossessions would rise and we would see a price crash as we did about 16 years ago”.

Inflation ‘easing off’

The rate decision comes as the latest monthly survey from Halifax shows that house price inflation is easing off…

The mortgage lender says that in May, house prices rose by just 0.3%, pulling the annual inflation rate down from 10.9% to 10.6%, reports the BBC.

It said this was clear evidence that the property market was now reacting to the four increases in interest rates since last summer.

The Halifax now puts the average UK house price at £196,893.

May was the second month in a row that the Halifax has recorded a slowdown in the pace of annual house price inflation, which reached a recent peak of 11.1% in March.

"The recent slowing down in monthly house price inflation, together with further evidence of moderation in housing market activity, suggest that the interest rate rises since last summer are having an impact on the market," said the Halifax's chief economist Martin Ellis.

Continued slide in enquiries

The mortgage lender pointed to a continued slide in enquires from new buyers, as reported by estate agents, and the recent drop in new mortgage approvals recorded by the Bank of England.

The Halifax predicts a further easing of house prices during the year, but Mr Ellis suggested this would only be moderate.

"Solid economic conditions and high employment support housing demand," he said.

"The market remains supported by solid economic foundations which, together with supply shortages, will continue to support prices," he added.

Analysts agree with Halifax's broad assessment that house prices will continue to lose buoyancy over the coming months as demand is pressurised by higher interest rates, modest increases in disposable income and high house prices themselves.

6% interest rates ‘a real possibility’

In addition, Global Insight's chief UK economist Howard Archer said 'the very real possibility' that interest rates could reach 6.0 pct before the end of the year is likely to act as 'a significant deterrent' to many potential house buyers.

Despite these factors, Archer said a general shortage of property means that pricing power is currently still in favour of the vendor, particularly in London and the South East, where prices are being fuelled by elevated City bonuses and strong foreign demand, as well as an acute shortage of supply.

'Nevertheless, significantly more houses have come on to the market in recent weeks as vendors looked to beat the originally planned introduction of compulsory Home Information Packs (HIPs) in June,' he added.

'This could well have some dampening impact on house prices in the near term at least, although it remains to be seen how housing supply will be affected by the now somewhat confusing situation over HIPs,' said Archer.