Bank of England holds interest rates

The Bank of England today stuck to its gradualist approach on monetary policy by leaving interest rates at 4% after twice raising borrowing costs since November.

The decision was in line with City expectations, as only one of 45 analysts polled by Reuters thought that the Bank's monetary policy committee (MPC) would increase rates. In its minutes last month, the Bank made clear its desire not to deliver any shocks to consumers at a time when they are heavily in debt.

Last month, all nine members of the MPC voted to raise interest rates by a quarter-point to keep inflation on target and curb house price growth and consumer spending.

Ahead of today's vote, Roger Lyons, the president of the Trade Unions Congress and the joint general secretary of the Amicus union, warned that high rates would hurt business and debt-burdened households.

"Green shoots of recovery face being crushed by a double whammy of low eurozone rates and a cheap dollar backed by an even lower interest rate," Mr Lyons said. "High rates will harm business first and then cast a shadow over millions of people who've borrowed money in the past couple of years and who aren't used to paying higher rates on their loans."

Although the Bank stayed its hand today, the City expects further rate increases later this year, with the next move possibly as soon as April, because recent rises in borrowing costs do not appear to have dampened consumer spending or house prices.

The Halifax bank yesterday reported that house prices rose 1.6% in February, which meant that an average home is now worth 17.8% more than a year ago. Consumer spending and borrowing also remain high. A survey from the Confederation of British Industry this week said 47% of retailers reported higher sales in February than a year earlier. Earlier data showed that high-street sales surged in January at their fastest pace in a year.

But complicating the Bank's job is mixed signals from the struggling manufacturing sector. There have been indications that manufacturing may have turned the corner, but the data is not clear-cut.

The Chartered Institute of Purchasing and Supply published a survey on Monday which said growth in manufacturing slowed last month after a strong January. That explains union concern at the prospect of higher rates, with union leaders warning that 50,000 jobs will be lost by Easter if the cost of borrowing continues to rise.

"With inflation below the Bank of England target level, there is no justification for British manufacturing to lose thousands more skilled jobs just as the sector appears to be turning the corner," Mr Lyons said.

Inflation is currently at 1.4%, well below the Bank's 2% target for the consumer price index, partly because of the strength of the pound. But while sterling's strength is helping to keep inflation under wraps, union research has shown that a strong pound against the dollar and the euro is handicapping the UK's ability to compete in global markets.

"Manufacturers will welcome this breathing space which will allow them to take advantage of an export-led recovery. The Bank is right to wait and assess the impact of the last two rate rises on both the consumer and the dollar weakness on the economy overall," said Dougie Peedle, deputy chief economist of the Engineering Employers Federation.