Inflation concern leaves loan rate on hold

Fears that the consumer spending spree on the high streets at Christmas could push up inflation prompted the Bank of England to keep borrowing costs unchanged yesterday, despite the deep recession engulfing industry.

The decision to keep rates on hold at 4% was widely expected by City economists, many of whom are betting that the Bank's next move will be to raise rates.

Sir Eddie George, the Bank's governor, warned last week that if household spending does not ease, the nine-strong monetary policy committee will be forced to take action.

But with inflation at its lowest levels since the early 1960s, and well below the government's 2.5% target, industry leaders said the Bank should not overreact to strong holiday sales figures. "Healthy retail sales must not overshadow the weakness of other parts of the economy," said Ian McCafferty, the Confederation of British Industry's chief economic adviser.

The Bank cut borrowing costs six times last year to insulate the economy from the global slowdown, prompting consumer spending to roar ahead and putting Britain at the top of the growth league table among major economies.

But while firms in the retail sector are thriving, manufacturing remains locked in a painful recession, with little relief in sight. Government figures yesterday showed that companies face their biggest profits squeeze since the recession of the early 1990s.

News from the corporate sector yesterday highlighted the problems facing the policy committee as it battles to keep Britain's twin speed economy on track.

While department store group House of Fraser announced a 7% surge in sales during Christmas, engineering group GKN said it would have to cut 950 jobs at its AgustaWestland helicopter joint venture as it continues to wrestle with falling sales.

Despite the crowds of shoppers thronging high streets in the run-up to Christmas, there are few signs that shops are taking advantage of strong demand to push up prices.

Some analysts believe mounting debts and the threat of rising unemployment will persuade households to tighten their belts this year, without the Bank being forced to take action.