LINGERING hopes for an early new year thaw in the Bank of England’s present freeze on interest rates were dashed yesterday when a united front by its Monetary Policy Committee left the City certain that borrowing costs will stay on hold into spring.

With even the more dovish external MPC members who backed August’s rate cut throwing their weight behind the Bank’s forecasts of a revival in the economy next year, economists said that any remaining expectations of an early rate cut had been extinguished.

“Not only are MPC members sending a loud and clear message that interest rates are on hold, but they are also indicating that the eventual next move may not even be down,” Howard Archer, of Global Insight, said Backing the Bank’s projections of stronger growth in the new year, David Walton, the committee’s newest member, who voted for August’s reduction, told the Commons Treasury Committee: “It looks as if we may have seen the trough in growth and that the economy has not continued to lose momentum.”

Steve Nickell, another external member who backed the August cut, echoed this view. He said: “Our best guess is that if the economy recovers from a slowdown and it happens as we expect, then it seems to me that no further movement in rates will be required.”

Kate Barker, a third external member, said that “parts of consumer spending do remain weak”, but added that prospects for next year should be better as incomes increase.

Mervyn King, the Bank Governor, repeated to the Commons committee his recent analysis that tax rises had played a large role in triggering the consumer slowdown. But he emphasised his view that the effects were now waning.

The Governor made clear that the MPC is on the alert for signs that high fuel prices might spill over into accelerating wage pressures in January’s wage round. “We’re going through a pay round in the next few months and it’s very important . . . that wages don’t pick up to compensate for the rise in inflation,” Mr King said, although he said that so far there was little sign of this.

Mr King’s comments came after Gordon Brown issued a call for public sector pay deals to be based on the assumption of 2 per cent inflation, in line with the Bank’s target.

The Governor also said that the Bank would “monitor very carefully” the recent surge in gas prices and any repercussions. He played down his having being outvoted over the MPC’s August rate cut. He said that this has been taken as a sign of the strengths of the Bank’s policymaking, rather than of any weakness.

SLOWING DOWN

• Business investment rose by 0.3 per cent to £28.8 billion in the third quarter, the Office for National Statistics said. Annual growth, at 1.9 per cent, was the lowest for over a year. The Bank of England says investment is set to slow in 2006.

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