The Bank of England's Montary Policy Committee (MPC) has opted to hold interest rates at 4.5% for the second month in a row.
The move to maintain interest rates at their current level - dropped from 4.75% to 4.5% in August - was widely expected despite the dip in consumer confidence revealed earlier this week by Nationwide Building Society.
The Nationwide Consumer Confidence Index for September showed a weakening of consumer sentiment. The main index fell by 6 points to 94, down from 100 in August. All four indices fell in September and the main index, present situation index and expectations index are now all at their lowest levels since the lender started measuring consumer confidence in May last year, it says.
Nationwide had forecast the probability the MPC would once again leave rates unchanged saying it was likely the next movement would be downwards, but that it was unlikely that any such move will happen this year.
The lowering of confidence has taken place against an increasingly uncertain economic background. The economy is growing at its slowest rate for 12 years and retail sales were flat in August with annual growth of just 0.8%, says the lender. Moreover, the damage caused by hurricane Katrina led to rapid price increases at the petrol pumps, hitting consumers in the pocket. But as prices have subsided the impact on confidence may prove to be short-lived, Nationwide adds.
Llyods TSB also claimed UK consumers were feeling the pinch as higher crude oil prices push up fuel related costs and consumer price inflation to an eight year high. It's own Financial Markets Consumer Barometer claimed 60% of consumers in September noticed an increase in prices during the last 12 months, up 8% on August.
Looking ahead, it says, over three quarters of consumers signalled they expected prices to increase further over the next 12 months, an increase of 4% on last month. The more pessimistic outlook about inflation has led to an increase in the number of consumers believing this time next year interest rates will be higher.
This view contrasts with expectations within the financial markets, which are anticipating further interest rate cuts. The minutes of the MPC meeting for September suggested rates would not be cut in the months immediately after that meeting.
Trevor Williams, chief economist at Lloyds TSB Financial Markets, says: "The fact consumers are starting to expect higher prices, is a concern for Mervyn King, governor of the Bank of England, because it could feed secondary effects on wages, ratcheting them higher.
"It suggests the Bank of England will be cautious, despite weaker than expected economic growth this year, facing an inflationary profile that is very likely to be upward sloping at least over the short-term.
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