Bank of England keeps interest rate at 5.75%

The Bank of England left the benchmark interest rate unchanged at a six-year high, saying it's trying to determine whether a surge in credit costs will harm the British economy.

The Monetary Policy Committee, led by Governor Mervyn King, kept the bank rate at 5.75 percent, as predicted by all 60 economists surveyed by Bloomberg News. The bank will release the minutes of the decision on September 19.

"The recent solid pace of output growth has been sustained," the bank said in a statement, its first that accompanied an unchanged decision since 1999. "It is too soon to tell how far the disruption in financial markets will impair the availability of credit to companies and households."

The central bank yesterday took its first steps to reduce U.K. money-market rates, which have climbed to the highest since 1998, following the collapse of the US subprime mortgage market. The turmoil has clouded the economic outlook less than a month after the bank signaled that five rate increases in the past year may not be enough to contain inflation.

The bank "is showing that they are conscious of the effects on the economy and that they're willing to act," said Michael Saunders, chief western European economist at Citigroup Inc.

"If conditions remain strained, they will probably lower rates.''

Market Reaction

On the last occasion that the bank issued a statement after a rate decision while making no change, in May 1999, policy makers lowered the benchmark the following month.

The pound fell as much as 0.3 percent to $2.0166 and was trading at $2.0195 at 1:05 p.m. in London. The FTSE 100 Index of leading U.K. shares fell 41.3 points to 6,229.4.

The Bank of England yesterday offered extra money next week to reduce "unusually high" overnight interest rates. The European Central Bank today loaned an additional ¤42.25 billion ($57.7 billion) to banks to help reduce the cost of credit. The shortage of funds in money markets is persisting even after the ECB, the Federal Reserve and other central banks added more than $400 billion to the financial system since Aug. 9.

The Australian central bank said today it will buy debt backed by home loans. Policy makers there and in Indonesia left key interest rates unchanged this week. The Bank of Canada made no change to its key rate, now 4.5 percent, yesterday.

ECB Decision

The ECB kept its benchmark rate at 4 percent today. No change was expected by economists in a Bloomberg survey. The U.S. Federal Reserve left its rate at 5.25 percent on August 7.

Commercial banks have been reluctant to lend to each other because of concern about borrowers' vulnerability to securities backed by US subprime mortgages, or home loans aimed at people with poor credit histories.

The gap between the U.K. benchmark rate and the three-month money-market rate, known as the London interbank offered rate, was the biggest in 20 years after yesterday's fixing.