Bank extends freeze on rates

The Bank of England yesterday held interest rates steady at 4.75% again but faced growing calls to cut borrowing costs to restore confidence to the consumer and the hard-pressed manufacturing sector.

The Bank's monetary policy committee had been expected to leave rates on hold for the tenth month running but business, trades unions and a growing number of City analysts say a cut is needed sooner rather than later.

"It is critically important that the MPC should now give greater weight to the worsening economic circumstances and consider more actively the need for an early cut in interest rates," said David Frost, director-general of the British Chambers of Commerce.

He was backed by TUC chief economist Ian Brinkley who said: "The Bank's decision is not a surprise, but it is too cautious. Inflation is not the problem, it is the slowdown in growth and the impact this will have on job growth. I think the case for a rate cut will strengthen as more evidence comes in, and I hope the Bank will reconsider its position in July."

The MPC announced its decision after official data showed continuing problems in manufacturing.

Although output rose 0.9% in April, that was not enough to reverse the 1.6% fall in March when production was interrupted by the Easter break. Taking the three months to the end of April together, said the Office for National Statistics, output was down 1.4% from the previous three months, the biggest drop since August 2002.

Output is only at about the same level as when Labour came to power in 1997. Since then the sector, squeezed by a strong pound, has shed a million jobs.

"Taking March and April together we are much weaker than last year," said an ONS statistician.

Most sub-sectors of manufacturing suffered a fall in the three months to April but the worst hit were publishing, chemicals and electrical equipment. Publishing output fell 3.7%, the worst since July 1980. Within the sub-sector, newspaper output and sales fell at the fastest pace on record in April from March.

The wider measure of industrial production, which includes North Sea oil and gas output, also rose 0.9% in April, almost reversing March's 1% fall but it still showed a fall of 1.2% in the latest three months.

The National Institute of Economic and Social Research said: "This data points to below-trend growth in the second quarter of the year following a similar experience in the first quarter. If weak growth persists the case for an interest rate reduction becomes stronger."

The Bank of England raised interest rates in successive steps last year to their current level in an attempt to take the heat out of high street spending and the housing market. It now seems to have succeeded, although the MPC has expressed surprise at how quickly consumption has slowed.

Tom Levinson, economist at ING, predicted the MPC would cut rates by a quarter point at its August meeting, coinciding with its new quarterly inflation forecasts.

The ONS also released figures showing that the country's goods trade deficit widened slightly to £4.8bn in April from £4.6bn the month before.

When the country's traditional surplus in services trade is included, the overall deficit widened to £3.4bn from £3.2bn in March.