BoE holds rates, keeping eye on markets

The Bank of England kept official interest rates steady for a second month running on Thursday, and said it was keeping a close eye on financial markets to see how turmoil there would hit companies and consumers.

But the BoE reiterated its main job is keeping inflation at 2 percent and noted that signs of price pressures were still elevated and the economy was running close to full tilt, even if there were some signs that consumer spending might be slowing.

It is too soon to tell how far the disruption in financial markets will impair the availability of credit to companies and households ... The MPC is monitoring closely the evolution of both credit spreads and the quantities of credit extended, it said.

The pound fell after the statement and interest rate futures rose as markets took the mention of the market turmoil, which has sent three-month interbank lending rates to 8-1/2 year highs, as a sign that policymakers would not raise interest rates again.

Economists, many of whom have been predicting another rise to 6 percent, said the statement -- the issue of which is almost unheard of accompanying a no-change decision -- still kept all options open for the MPC.

It's a clear signal that they are not prepared to drop the tightening bias quite yet or close the door to another rate hike, said Lena Komileva, economist at Tullett Prebon.

But many commentators also wondered whether the window of opportunity, or even need, for a rate hike was passing.

Monetary conditions have already tightened considerably in Britain as banks become afraid to lend to one another for fear that many could be sitting on huge losses emanating from risky investments in the U.S. subprime sector.

Other central banks around the world appear to have changed course as a result of the market trouble. In Frankfurt, the European Central Bank also held interest rates steady.

With calmer financial market conditions seemingly some way off, the Fed likely cutting rates and the Bank of Japan and ECB Bank no longer expected to hike in the final quarter, we now doubt that that the BoE will have enough confidence in the macro environment to implement one last rate rise, said James Knightley, economist at ING.