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Interest rates set to be held at 5%.

The Bank of England is expected to peg interest rates at 5% later this week. However, economists have warned borrowing costs could rise for the third time since August when the bank's rate-setting committee meets again in February. Policymakers will be concerned about consumer price inflation of 2.7% and the prospect that wage deals this month could fuel the figure. Members of the Bank's nine-strong Monetary Policy Committee will also have noted further growth in house prices and a buoyant services economy.

Their decision on Thursday is likely to be no-change as members will prefer to wait for projections in the bank's quarterly inflation report in February. The last two rate rises have come in months when the report has been published.

The inflation report provides estimates of where inflation will be over a two- year horizon. There are hopes that inflation could fall back to its 2% target by the middle of the year, particularly as oil and energy prices are not expected to repeat the sharp increases seen through much of 2006.

But the big headache for the bank will be the outcome of the new year wage round.

It is more of a concern than usual because the Retail Prices Index measure of inflation - used in many wage deals - stood at 3.9% in November, following higher food prices as a result of poor harvests. RPI differs from the headline measure of inflation because it includes housing costs.

Economists believe that there is a chance that sufficient slack in the labour market will limit workers' bargaining power and contain the wage increases.

Howard Archer, chief European economist at Global Insight, said, 'We expect pay settlements to be higher in the 2007 wage rounds, but only modestly and not enough to alarm the Bank of England.'

The picture on wage rises may not become clear until March, when official figures are released.

Philip Shaw, chief economist at Investec Securities, said, 'We expect these to be insufficient to provide the MPC with definitive evidence on whether wages are proving an inflationary threat by next month.'

He is looking for rates to remain on hold for the first half of the year, before a reduction in the second half.

He added, 'We suspect that pay deals will prove not to be an inflationary threat, that the economy will grow slightly below trend and that inflation will head back towards 2% by mid-year.'
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Title Annotation:Business
Publication:Western Mail (Cardiff, Wales)
Date:Jan 8, 2007
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