Interest rates stay unchanged

The Bank of England today left interest rates unchanged at 4.75% for the fifth month running amid further signs of a weakening economy.

Hours before the Bank announced its decision, news came of an unexpected drop in manufacturing output in November, the fifth decline in six months.

The Office for National Statistics (ONS) said manufacturing output dropped 0.1% in November, matching a similar unrevised fall in October. November's drop confounded City expectations for a 0.3% rise. On an annual basis, manufacturing output, which accounts for over 17% of gross domestic product, was steady compared with November 2003.

Industrial output as a whole rose 0.2% in November, breaking a five-month streak of declines, but was still up less than the 0.4% economists had expected. That left it down 0.9% compared with a year ago.

"Another month, another downside surprise for UK production. While industrial output did show its first month-on-month rise since May 2004 (of 0.2%), this reflected a sharp rise in the volatile oil and electricitiy sectors, as manufacturing output fell 0.1% in November," said John Butler, an economist with HSBC.

Today's interest rate decision was widely anticipated even before news of the latest decline to manufacturing. All but one of 43 economists in a recent Reuters poll predicted that the Bank's monetary policy committee would leave borrowing costs steady as evidence accumulates of a cooling economy.

Economic growth weakened in the third quarter, house prices have slowed, while inflation remains well under the government's 2% target. Signs of a consumer slowdown during what has been described as the worst Christmas in a decade for retailers also reinforced the case for leaving rates unchanged.

The debate now among economists is whether the Bank will cut rates this year. While 20 of the 43 economists polled by Reuters believe that rates have already peaked after five quarter-point interest increases since November 2003, the other 23 forecast at least one more tightening this year.

Philip Shaw, the chief economist at Investec, thinks it is much too early for an interest rate cut.

"We remain dismissive of talk of a cut in rates, especially near-term, unless something goes badly awry in the domestic or global economies," Mr Shaw said.