Bank keeps interest rates on hold

Homeowners and industry leaders breathed a sigh of relief yesterday when the Bank of England froze interest rates for the seventh consecutive month.

The Bank's monetary policy committee kept rates at a 38-year low of 4% despite pressure to dampen consumer spending with higher borrowing costs.

Business leaders welcomed the decision. Ian McCafferty, chief economic adviser to the CBI, said: "The economy remains fragile despite early signs of a pick-up in manufacturing. The heat in the consumer market is beginning to cool and interest rates need to stay stable to ensure the upturn takes hold."

Unions had warned that an increase in rates yesterday could lead to further job losses in the struggling manufacturing sector. John Monks, general secretary of the TUC, said: "The clamour in parts of the City for an immediate interest rate rise exaggerates inflationary dangers. We hope the MPC will continue to make a balanced judgment and keep rates at their current level for the foreseeable future."

Sally Low, head of policy at the British Chambers of Commerce, admitted that with the consumer side of the economy performing strongly, the Bank's task was "a difficult balancing act", but said it was right to give manufacturers a "breathing space". Despite the booming property market, gov ernment figures showed the economy failed to expand in the first three months of the year, after grinding to a halt in the aftermath of the September 11 attacks. Analysts said the MPC was waiting for firmer evidence of recovery before trying to choke off inflation.

"The Bank clearly remains concerned about the very fragile nature of the recovery," said George Buckley, UK economist at Deutsche Bank. "We have seen six months of zero growth, the manufacturing sector still entrenched in recession and the outlook for corporates very uncertain."

But with house prices rising at their fastest rate since the late-1980s boom, and a series of surveys showing firms are optimistic about their prospects in the months ahead, City analysts said an increase in rates could follow soon. "This does not change our fundamental analysis that rates are headed higher," said Michael Hume of Lehman Brothers.

He said when the minutes of the MPC's meeting were published in a fortnight, "we expect them to show that the meeting was a close call, with a split vote highly likely". Only eight of the MPC's nine members were present at the monthly meeting, which began on Wednesday.

News that rates had been left unchanged came as the British Retail Consortium reported that hot competition is holding down inflation on the high street. Its monthly index showed prices fell between April and May by 0.4%. "There is therefore no reason for the MPC to increase interest rates," said the BRC's director general, Bill Moyes.

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