Interest rates on hold as manufacturing output falls

Fears of an early rise in interest rates receded yesterday as the Bank of England left borrowing costs on hold at 5%, and official figures showing a surprise drop in manufacturing output cast doubt on the strength of the economic recovery.

While the next move in interest rates is still likely to be upwards, given the buoyancy of the housing market, it may not come until next year, City analysts said.

"Today's numbers reinforce our view that recent talk of monetary tightening is somewhat misplaced, and that a steady hand policy stance is the most appropriate at this stage of the cycle," said Audrey Childe-Freeman, of the Canadian investment bank CIBC.

The manufacturing figures, published by the office for national statistics, showed a drop in output of 0.2% between May and June. Breaking a sequence of three successive monthly rises, they were at odds with recent survey evidence of a sharp rebound in activity.

But, with output in the latest three months still rising by 0.4% compared with the previous three, the trend is still upwards.

Nevertheless, Richard Iley, of the Dutch bank ABN Amro, said the sector was likely to crawl rather than bound out of recession.

"While it is premature to drop the epithet of 'dual economy' to describe the relative performance of manufacturing and services, the former is on the turn despite today's modest setback," said Mr Iley.

The Bank's monetary policy committee gave no reasons for its decision to leave rates on hold for the second month in a row, saying its analysis of the outlook for inflation would appear in next week's quarterly inflation report.

Ken Wattret, of Paribas, said that, while rising house prices were a concern, the MPC would not start ringing alarm bells about inflation just yet.

"The last rate cut came only in June and given last autumn's embarrassing policy about-turn, there would have to be a serious build-up of inflation pressure to trigger a hike soon. We don't see one," he said, noting that the pound remained strong and wages subdued.

The weakness of inflation pressures in the high street was underlined by the British Retail Consortium's monthly shop prices index.

It showed prices of the 200 most commonly bought items - including clothing, food and household goods - were 0.8% lower in July than in June.

Ann Robinson, director general of the BRC, said: "Prices fell month-on-month in June and July, demonstrating that, although retailers began sales early, there were further price cuts as the sales went into July."