Manufacturing breathes sigh of relief over rates

Hopes that borrowing costs may have reached their peak were raised yesterday after the Bank of England left its key interest rates on hold at 6% for the fourth month in a row.

The decision was greeted with relief by industry and homeowners as new figures underlined the fragile state of Britain's manufacturing sector. Government figures showed firms cut output by 0.2% in April, completing a month of weak data which had led many City economists to predict that the Bank would make no change to rates yesterday.

"Not only is manufacturing back from the brink of a technical recession, but consumer activity also appears to be easing, while the housing market is coming off the boil," said Dharshini David at HSBC.

The office for national statistics said the fall was the result of a bad month in the car industry. Output fell almost 10% as uncertainty over the future of Rover's Longbridge plant and the impact of the pound's strength took their toll.

"We believe that from here the arguments may start to switch toward when the Bank will look to cut rates," said Neil Parker, senior European economist at the Royal Bank of Scotland.

But he warned there was still a danger that the pound could plunge, forcing the Bank to raise interest rates.

The pound took a tumble immediately after the Bank's monetary policy committee announced their decision. It fell to fresh five month lows against the euro, trading at above 63p for the first time since January 6th, equivalent to DM3.10, and was also down against the dollar.

The pound has now lost more than 7% against the currencies of Britain's major trading partners since the monetary policy committee last met and is now below the Bank's forecast.

However, industry leaders cautioned the Bank against reacting too rapidly to the pound's recent bout of weakness. "The Bank is right to avoid a knee-jerk reaction to initial signs of a weaker pound," said Dr Ian Peters, deputy director general of the British Chambers of Commerce. "Sterling remains above a level at which UK manufacturers and exporters can compete effectively and this is having damaging knock-on effects across the wider economy." The BCC would oppose another rate rise unless the pound dropped below the equivalent of DM3.