MPC doves win the day

The Bank of England took out an insurance policy against the risk of a stalling economic recovery in the UK yesterday when it cut interest rates to their lowest level since Winston Churchill was in Downing Street.

Concern about the gloomy prospects for exporters and the risk of Britain's long-running consumer boom coming to an end lay behind the first easing of monetary policy since February, the Bank revealed in a statement.

In a sign that the "doves" on the monetary policy committee had won the day after several months in which Bank insiders have kept rates on hold, the statement said weak pay pressures and a rising pound meant there was no risk of the cut leading to a surge in inflation.

Business groups, which had been putting strong pressure on the MPC to ease the pain felt by industry, said the decision would provide a boost for exports and jobs.

"Manufacturers will applaud this bold, decisive action and the Bank's attempts to underpin the domestic economy," said Stephen Radley, chief economist at the Engineering Employers Federation, which has repeatedly called for a further reduction in rates to cushion its members against the slowdown in the global markets.

Director general of the British Chambers of Commerce, David Frost, also welcomed the move, which takes rates to 3.5%, their lowest rate since January 1955. "We applaud the Bank for seizing this opportunity to stimulate spending and investment. The business sector needs a boost - manufacturing continues shedding jobs and the service sector has also suffered a slowdown," he said.

The TUC's senior economist, Ian Brinkley, agreed.

"This is a very welcome and timely decision. The rate cut will support growth, give industry more confidence, and help lock in the gains from the more competitive pound," he said.

Yesterday's announcement came after data earlier this week showed that manufacturing remained in recession in May, with output falling. Unemployment has been rising for the past four months, while the economy scraped growth of just 0.1% in the first three months of the year - the slowest pace for a decade. Recent surveys have shown only modest signs of a so-called "Baghdad bounce" following the war against Iraq, and rising taxes and a slowdown in the housing market have taken their toll on consumer confidence.

Analysts said an indication of the MPC's new mood had been evident from the first in terview of the new governor, Mervyn King, at the start of the month, in which he pointedly highlighted the rebound in the value of sterling.

Investec chief economist Philip Shaw said: "The MPC has recognised that inflationary pressures are few and far between.

"The cut in rates should help support the economy over the remainder of the year and ahead of the widely expected global recovery."

The Bank's move was also welcomed by the CBI, which praised the Bank for listening to the concerns of businesses.

CBI chief economist Ian McCafferty said: "The Bank's move will help support the economy, which has lost momentum this year."