April 8 (Bloomberg) -- The Bank of England left its benchmark interest rate unchanged at 4 percent for a second month, encouraging expectations for a rate increase in May.

The U.K. central bank has raised its repurchase rate by a quarter point twice since November. All of the 45 economists surveyed by Bloomberg News yesterday predicted the bank would boost rates by next month to slow consumers' borrowing and house- price growth.

Bank of England Governor Mervyn King has said policy makers intend to raise rates ``gradually'' as they struggle to balance the pressures of rocketing household debt against a faltering recovery in manufacturing, hampered by a stronger pound.

``This leaves us on track for a rise in May,'' said Ross Walker, an economist at Royal Bank of Scotland Group Plc, who correctly predicted today's rate decision. ``It's consistent with their gradualist approach.''

The pound dropped against the euro and the dollar after the rate decision. Interest rate futures fell with the yield of the three-month contract due in June at 4.53 percent at 1:09 p.m. from 4.60 percent immediately before the bank's announcement.

The U.K. central bank's two previous rate rises, in November and February, have coincided with the publication of its quarterly forecasts of growth and inflation. The next set of projections will be released in May.

The decision ``is consistant with that pattern,'' said John Butler, an economist at HSBC Holdings Plc. ``If they had gone now, outside an inflation report month it would have looked like a knee jerk reaction to the housing market whereas next month gives them the chance to justify their decision.''

Highest in G-7

Britain's economy grew 2.2 percent last year, the most since 2000, exceeding Chancellor of the Exchequer Gordon Brown's forecast of 2.1 percent. That was quicker than the 0.4 percent growth in the euro region, where Germany's economy shrank. Growth touched 3.1 percent in the U.S. and 2.7 percent in Japan.

A rise in borrowing costs would have exacerbated the differential between Britain and other major economies. The U.K. has the highest interest rates in the Group of Seven industrial nations. That gap has already contributed to a strengthening in the pound which King said last month is hurting exporters.

The pound has risen 4.4 percent against a basket of currencies weighted according to U.K. trade patterns since the Bank of England became the first of the world's four biggest central banks to start raising rates in November.

Central Banks Worldwide

The European Central Bank left its key rate at 2 percent last week. The U.S. Federal Reserve has left its benchmark lending rate at a 45-year low of 1 percent since June, while the Bank of Japan has a policy of zero interest rates.

Other central banks are lowering rates. The Bank of Canada cut its key rate a quarter percentage point to 2.25 percent last month, and Sweden's Riksbank last week reduced borrowing costs by a half point to 2 percent, the lowest in a century as inflation waned and companies such as phone-equipment maker Ericsson AB cut jobs.

A recovery in manufacturing is sputtering, with output unexpectedly falling 0.6 percent in February. Lobby groups praised the bank's decision, saying higher rates would add to the pound's gains and boost the price of British exports.

``Today's decision by the MPC is the preferred option for business,'' said David Frost, director general of the British Chambers of Commerce. This year may be ``the U.K.'s first year of above-trend growth since 2000, but this growth is not enjoyed by all sectors.''

Consumer prices rose 1.3 percent in February from a year ago, below the central bank's 2 percent goal. The bank's projections show it rising through the target level in two years' time.

Borrowing Binge

Still, the central bank may want to curb consumer spending as house prices, which have spurred a borrowing binge, accelerated. Policy makers started raising rates from a 48-year low as consumers took on a record 956 billion pounds in debt ($1.8 trillion) through February, pushing up house prices and threatening to quicken inflation.

U.K. home values, underpinned by falling unemployment, grew 18.5 percent in the first quarter, the fastest annual pace in six months, according to HBOS, the nation's largest mortgage lender.

Evidence in the past weeks suggests consumers' willingness to borrow and spending is equally buoyant. Mortgage equity withdrawal climbed to a record in the fourth quarter, figures last week showed. Britons also took advantage of financing deals to purchase more cars than ever before in the first quarter.

``The lending data and the housing market are not showing any signs of responding,'' said Andrew Clare, an economist at Legal & General Plc. ``It's clear now that it's not going to stop without action'' from the Bank of England.

Lowest Unemployment

Britain's unemployment rate at 4.8 percent is the lowest in the G-7 countries. It's below the rates of 5 percent in Japan, 5.7 percent in the U.S., and in Europe, 9.2 percent in Germany and 9.5 percent in France.

U.K. earnings growth accelerated to 4.4 percent, the fastest pace since September 2001, in the quarter through January. The central bank has said increases above 4.5 may threaten its inflation objectives.

-- Editors: Harris, Kirkham, B. O'Connell

To contact the reporter on this story: Duncan Hooper in London at dhooper@bloomberg.net.

Last Updated: April 8, 2004 08:19 EDT