Industry warns Bank against rate rise

British industry yesterday fired a warning shot across the bows of the Bank of England, calling for it to leave interest rates on hold today, or risk damaging the fragile economic recovery.

As the nine members of the Bank's monetary policy committee gathered for their monthly two-day meeting, the TUC and the Engineering Employers' Federation cautioned them against inflicting further pain on the recession-hit manufacturing sector by raising borrowing costs.

"Our message to the MPC is: don't choke off any recovery by raising rates now," said Stephen Radley, the EEF's chief economist. "If rates rise this week it would hit confidence and exacerbate firms' cash-flow problems _ It would not be sufficient to derail recovery but it would slow it down."

John Monks, the TUC's general secretary, agreed, demanding that the MPC resist "siren City calls" for higher rates. Delivering the TUC's assessment of the prospects for Britain's economic recovery, he said growth should recover to 2% this year - the low end of the Treasury's forecast - but higher borrowing costs could drag it down.

"The biggest domestic threat to the government's economic growth forecasts is the manufacturing recession," he said. "With no inflation in the economy, we think the Bank can freeze rates for the foreseeable future." Mr Monks also called on the chancellor to take action in next month's spending review to boost manufacturing and the regions.

In its quarterly economic outlook, the EEF cautioned against undue optimism over the long-awaited recovery in manufacturing, arguing that low profit margins, subdued prices and cashflow problems would stop engineering firms from investing. They are expected to shed 90,000 jobs this year on top of 70,000 in 2001.

"There are some signs of improving confidence but little tangible evidence of actual growth," Mr Radley said.

Fears that a recovery could stall were reinforced by the monthly Purchasing Managers' Index for manufacturing, published yesterday, which showed the pace of expansion slowing last month. The business activity index for May registered 52.9 - above the crucial break-even mark of 50, but weaker than April's 53.2.

However, some City analysts said booming house prices and a series of positive readings in business surveys - together with the falling value of the pound, which hit its lowest level against the euro since 1999 on Tuesday - could still prompt the MPC to raise rates.

"The issue for the Bank is not the level of surveys but whether official data are likely to follow their lead," said Michael Hume of Lehman Brothers. "We judge that after the recent tumble in the exchange rate, the MPC will be sufficiently confident that this will happen for them to pull the trigger on rates."

Speculation that borrowing costs could rise contributed to a gloomy day on the stock markets yesterday, with the FTSE 100 tumbling to an eight-month low of 4989. Analysts said the sell-off also reflected heavy losses on Wall Street earlier in the week while the London markets were closed for the double bank holiday.

US stocks remained subdued yesterday, despite news that the service sector is growing at the strongest rate for almost two years. The Institute for Supply Management's index of the sector rose to 60.1 for May, its highest since August 2000.