Bank leaves interest rate unchanged

The Bank of England today spared the City a second shock in as many months by holding interest rates at 3.75%.

A month after it surprised financial markets with a quarter-point rate cut, the bank's nine-member monetary policy committee (MPC) opted to keep rates at their lowest level for 48 years despite latest evidence of economic weakness.

In the latest dose of weak data, a joint report from the Chartered Institute of Purchasing and Supply and Reuters yesterday showed that the services sector, which accounts for about two-thirds of the British economy, barely grew at all last month. Profit margins were further squeezed by higher oil prices and discounting and companies cut more jobs.

It was the bleakest reading for services since the end of 2001, when sectors such as tourism were struggling with the aftermath of the September 11 attacks.

Earlier in the week, the CBI said that the threat of war and jitters about the possible collapse of the property boom had given retailers their worst three months since 1999. The Bank of England, however, has downplayed fears of a collapse in consumer confidence, arguing that spending will moderate gradually because unemployment and interest rates remain low.

Meanwhile, the manufacturing sector continues to shed jobs as it struggles with its worst downturn in a decade, with exports in freefall. In last month's MPC meeting, members voted 7-2 to cut rates in the face of further falls in the stock market, a weakening global economy, and declining business and consumer sentiment at home and abroad.

Last month's decision surprised economists, who thought the bank would leave rates alone so as not to feed the imbalances in the UK economy, where robust consumer spending and steeply rising house prices have gone hand in hand with a struggling manufacturing sector. The cut in rates led some economists to criticise the bank for choosing short term growth at all costs, a move that would build up problems for later.

The two who opposed last month's rate cut, Andrew Large and Paul Tucker, argued that a modest cut in rates would not have much impact on business investment but could prompt further, unsustainable, accumulation of debt by households. The two wanted the MPC to wait to see whether consumer spending had really slowed down and whether consumer confidence would pick up after a possible war in Iraq.

As the MPC deliberated on interest rates, there was more gloomy news from Germany, Europe's largest economy. German unemployment in February rose by a higher-than-expected 60,000, pushing the jobless rate there to 4.7 million, or 11.3%, its highest level since the chancellor, Gerhard Schröder, came into office in 1998.

Economic weakness on the European mainland has been a big cause for concern at the Bank of England.