Industry dejected as Bank pegs rates

The Bank of England disappointed investors and industry leaders yesterday when it left interest rates unchanged for the 11th month in a row, despite renewed fears about the health of the economy.

Caught between a housing market which is showing clear signs of overheating and a depressed manufacturing sector, the Bank's monetary policy committee kept rates frozen at a 38-year low of 4%.

Few economists had expected any change this month after the Halifax revealed that property prices are rising at their fastest rate since the late 1980s bubble. But engineering industry representatives expressed disappointment, warning that the fresh turbulence in the share market over the past month was eroding business confidence. The FTSE 100 index of leading shares has fallen more than 10% since the committee last met.

"The MPC has missed an ideal opportunity to cut rates and help shore up the UK economy," said Stephen Radley, chief economist at the EEF. "Manufacturing confidence has taken a battering over the summer in the face of the falling stock market and an international outlook that is clearly getting worse," he added.

The Confederation of British Industry said that, while stability was the best medicine for Britain's bruised corporate sec tor, the MPC had to be ready to act swiftly if the economy weakened further. "Before making a move the Bank needs to be convinced that a cut would not need to be quickly reversed," said Ian McCafferty, the CBI's chief economic ad viser. "But there are worrying signs emerging. Growth in the rest of the world is losing momentum, UK manufacturing remains mired in recession, and consumers are becoming less keen to spend."

City economists said the minutes of the meeting due out in two weeks time would almost certainly reveal that fear of stoking up the property market boom further explained yesterday's decision. But should the economy weaken further, most expect the MPC to act.

Next month's meeting of the committee which coincides with the Bank's quarterly assessement of the inflation outlook is now seen as pivotal. Inflation is 2%, and has been comfortably below the government's 2.5% target for most of the past three years.

"We would not be surprised if the early runs of the Bank's econometric models result in inflation below 2.5% in two years time," said Philip Shaw, UK economist at Investec. "If so this could give rise to a 0.25 percentage point cut in rates."

Mr Shaw said that the chancellor could use his pre-Budget report next month to raise stamp duty on house sales to tame the property market.