Industry welcomes MPC stance

The Bank of England yesterday shrugged off calls for an early rise in interest rates to rein in buoyant consumer spending and soaring house prices, leaving borrowing costs on hold at 4%.

Its stance was mirrored by the European Central Bank, despite higher than expected inflation figures and industrial action from Germany's biggest trade union, which is pressing for higher wages.

Growing signs that Britain is recovering from last year's downturn led to speculation that the monetary policy committee would begin reversing the seven rate cuts it made in 2001 - but industry yesterday welcomed its decision.

"Today's decision is the right one, as there continues to be little inflationary threat at the factory gate, on the high street or in the workplace," said Stephen Radley, chief economist of the Engineering Employers' Federation. "Talk of increases in interest rates is premature, as any rise would only serve to stop the tentative recovery dead in its tracks."

Inflation in February stood at 2.2%, safely below the government's 2.5% target, and news that prices in the shops have risen by less than 1% over the last year provided further evidence yesterday of the lack of upward price pressure. The British Retail Consortium's monthly shop price index for March prices just 0.69% above the same month last year.

Bill Moyes, the BRC's director-general, said the figures showed that recent sales growth had not created any sudden rise in shop prices. "Fierce competition across the retail sector is keeping high street prices way below any rises consumers are experiencing elsewhere."

Despite the optimistic outlook for inflation, MPC members have expressed concern about household debt, and analysts were warning yesterday that the strength of consumer spending could force up borrowing costs by the summer.

"While we welcome today's unchanged interest rates, recent economic data have been firm and point to higher interest rates," said Ruth Lea, of the Institute of Directors. "Indeed we expect a rise by the end of the second quarter, despite the benign inflationary picture."

The MPC's widely expected decision coincided with news that activity in the service sector has bounced back to last year's levels. The sector index from the Chartered Institute for Purchasing and Supply was above the break-even mark of 50 for the third consecutive month at 53.8, its highest level since March 2001.

The City now scents the possibility of a rates rise in May, although Kamal Sharma, a currency economist at Commerzbank in London, argued the MPC would not be in a rush to increase borrowing costs. "They won't want to choke off an industrial recovery before it's even started," he said.

In Frankfurt the ECB explained its decision to leave its main repo rate unchanged at 3.25% by saying it still expected inflation to fall below its 2% target this year. But president Wim Duisenberg acknowledged: "The decline may be less pronounced than foreseen and inflation rates this year could turn out to be somewhat higher than expected."

The ECB believes the cycle hit bottom at the end of last year and is heading upwards. It sees wage moderation as crucial to the inflation outlook.