Interest rates left unchanged

By JANE PADGHAM
Updated:

 

BUSINESS leaders welcomed the Bank of England's decision to leave interest rates on hold today, highlighting the fragility of the manufacturing recovery. But their praise was drowned out by City economists who warned that an increase in the cost of borrowing in May was all but inevitable.

In one of its toughest decisions since it was created in 1997, the Bank's monetary policy committee elected to keep rates at 4% for the second month in a row after raising them in November and February. The City had been split virtually down the middle on whether the MPC, headed by Bank Governor Mervyn King, would hold rates steady or lift them by a quarter-point.

CBI chief economist Ian McCafferty said: 'Business is pleased the Bank has not rushed into a decision to raise interest rates. The manufacturing recovery is fragile, inflation prospects are well under control and the previous two rate rises have not fully fed through.'

David Frost, director general of the British Chambers of Commerce, said: 'Strong independent survey data has yet to translate into a growth trend for manufacturers, meaning that early rate rises would be a further blow to this hard-pressed sector.'

Steve Radley, chief economist at the Engineering Employers' Federation, said: 'Two rises in three months would have poured fuel on the fire of expectations of further rises to come, potentially pushing the pound to damaging levels against the dollar.'

Grim figures on manufacturing earlier this week, showing that factory output slumped by 0.6% in February, are thought to have tipped the balance in favour of a no-change decision, offsetting concerns about the house price boom and mounting levels of household debt.

However, economists said the stay of execution would be short lived. 'No rate rise today means expectations will be rolled forward - and fulfilled we believe - into May,' said Ciaran Barr at Deutsche Bank. The City expects rates to end the year at 4.75%.

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Just hours before the announcement-trade figures soothedfears the strong pound is hitting exports. Britain's trade in goods deficit shrank to £4.25bn in February from a record £5.45bn the previous month as exports to the US surged by 17%.

Meanwhile, shop price inflation fell to 2.34% in March from 2.7% in February, according to the British Retail Consortium. It said last year's heatwave had more of an impact on inflation than consumer demand.

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