Industry turns on Bank as rates held

The Bank of England yesterday made a concerted effort to talk down the level of sterling on the foreign exchanges after admitting that its decision to leave interest rates on hold risked an undershoot of the government's 2.5% inflation target.


Both sides of industry turned on the Bank in the wake of the no-change decision by its nine-strong monetary policy committee, with unions and employers warning that cheaper borrowing costs and a lower pound were vital to restore competitiveness.


The CBI said it was 'a missed opportunity' and called for the downward trend in rates to resume next month.


In a statement explaining its decision to peg rates at 5.25%, the Bank said that the recent signs of a revival in growth, underlined by a fresh survey of the service sector yesterday, meant that inflation was expected to be broadly in line with the government's 2.5 per cent target. 'The projection takes account of the rise since February in sterling's effective exchange rate, and assumes a decline from its present high level.


'If sterling were not to weaken as assumed, it is likely that inflation would undershoot the inflation target over the coming two years.


In those circumstances, depending on other developments in the economy, there might, therefore, need to be further easing of interest rates in order to keep inflation on track to meet the 2.5% target.'


The Bank has cut interest rates six times since last autumn in an attempt to prevent the economy from nose-diving into recession this year.


A survey yesterday from the Chartered Institute of Purchasing and Supply showed clear signs of a recovery in the service sector, where activity grew for the second month in a row.


However, the unexpected rise in sterling against the euro has made life even more difficult for the manufacturing sector, which has been in the doldrums for the past year.


The Bank has been predicting a fall in the pound for some time, but despite its comments yesterday the pound closed at just under three German marks, higher than when Britain joined the Exchange Rate Mechanism nine years ago.


John Monks, the general-secretary of the TUC, said: 'Now is not the time for caution. The way was clear for further cuts - the economy faces no pay pressures, no threats from inflation, and rates in Europe are half what they are this side of the Channel. This is not the time to wait and see.'


Martin Temple, the director-general of the Engineering Employers Federation, said: 'In the absence of further cuts in interest rates, the UK will continue moving towards an imbalanced economy, with a manufacturing sector being penalised by a high pound and interest rates which are still at twice the level of our European counterparts.


We hope that the decision is still just a pause in the overall downward trend.'