Bank expected to hold interest rates

Weak economic data today all but ensured that the Bank of England would hold interest rates steady next week.

A manufacturing survey by the Chartered Institute of Purchasing and Supply (CIPS) revealed that, for the first time in almost two years, manufacturing activity had shrunk following the collapse of the car manufacturer MG Rover.

The CIPS said its purchasing managers' index (PMI) had fallen to 49.5 last month - its lowest reading since June 2003, and below expectations of 51.5 - from 51.6 in March. Any reading above 50 indicates expansion, while anything below signals contraction.

Meanwhile, more evidence of belt-tightening among consumers emerged as the Confederation of British Industry (CBI) reported another drop in retail sales today. The volume of retail sales again fell in the year to April - the most significant year-on-year fall since July 1992, according to the CBI's monthly distributive trades survey.

With the manufacturing recovery stalling, consumers spending less and an increasingly fragile global economy, the Bank of England looked set to leave borrowing costs unchanged for the next few months, analysts said.

"The CBI survey will have reinforced the MPC's belief that weak consumer spending poses a major downside risk to the growth and inflation outlooks," Howard Archer, the chief UK economist at the consultancy Global Insight, said.

"With the PMI manufacturing survey data for April also very soft and the global economy looking increasingly fragile, the outlook for second quarter growth is looking increasingly worrisome.

"We are seriously wavering in our long-held belief that the next move in interest rates will be up. At the very least, we expect any rate hike to be delayed until the third quarter," he added

The Bank's monetary policy committee (MPC) last month left rates unchanged at 4.75% for the eighth month running - although two MPC members voted for a rise.

Many analysts had been expecting the MPC to raise borrowing costs at some point over the summer to head off inflationary pressures, but the City is reassessing those expectations amid growing signs of economic weakness.

The drop in manufacturing activity was mainly due to a shortfall in new orders leading to a slowdown in production. MG Rover, which once produced the Mini and Land Rover, went bankrupt last month after a deal with a Chinese company fell through.

"There is some indication that this is partly due to the collapse of Rover, which has hit suppliers really hard," Chris Williamson, of NTC Research, which compiled today's manufacturing survey, said.

Similar surveys published yesterday showed that manufacturing in the eurozone had contracted for the first time in nearly two years. Manufacturing growth in the US slowed to its weakest pace for almost two years.

"The synchronised nature of the global slowdown suggests that it may be due to the persistently high level of oil prices and evidence that US activity, which had been key to supporting global trade, has slowed," said John Butler, of HSBC.

"The question is now whether this renewed soft patch is temporary or indicative of a more sustained downturn. The latter would point to interest rates having peaked."

In its survey, the CBI reported that 46% of retailers said their sales volumes were down in April, with 32% saying their sales were up - a balance of minus 14%, which compares with a figure of minus 9% in the March survey. This was despite retailers' expectations in March that sales would stabilise, the CBI said.

"These results add further weight to the argument against a premature rise in interest rates," Ian McCafferty, the CBI's chief economic adviser, said.