MPC leaves rates on hold but analysts say cut must come soon

The Bank of England yesterday endorsed Gordon Brown's upbeat view of the economy when it left interest rates on hold at 3.75% for a second month.

Business leaders said that, with few City forecasters sharing the Chancellor's optimism, the Bank's nine-member monetary policy committee would soon be forced to cut rates.

"Companies will be looking to the MPC to take decisive action in the coming months to promote growth and investment through an extremely difficult period," said Stephen Radley, chief economist at the Engineering Employers' Federation.

The Bank cut rates to a 48-year low in February as the build-up to military action in Iraq knocked consumer confidence and sent equity prices plunging.

With the conflict apparently nearing a close, Horst Köhler, managing director of the International Monetary Fund, yesterday held out the prospect that the world economy will emerge relatively unscathed.

"Nobody can estimate today with any precision the lasting costs of the war in Iraq," he said as finance ministers from the world's seven leading economies gathered in Washington to discuss the international outlook. "But so far the risks of the war for the global economy have remained contained."

Many analysts fear that the fall of Saddam Hussein's regime will fail to dispel the clouds over the global economy.

"I maintain my view that, with global demand likely to remain fragile even after the war in Iraq is won, the MPC will need to cut interest rates all the way to 3% by the end of the year to keep consumers spending and the economy growing," said Roger Bootle, economic adviser to Deloitte and Touche.

The Bank is to present revised growth forecasts in May, and analysts said it was likely to bring its figures into line with Mr Brown's. At present, the Bank is pencilling in growth of 2.5% this year, now the top end of the Treasury's forecast.

"On balance we expect the Committee to lower interest rates by 25 basis points next month once it has taken a look at its new economic projections," said Philip Shaw, UK economist at Investec