Old Lady turns blind eye to problems in the factories and keeps interest rates on hold

The Bank of England ignored evidence of a deepening slump in manufacturing yesterday to leave interest rates on hold at 4%.

Despite calls from industry for lower borrowing costs, the Bank's decision reflected growing concern on the nine-member monetary policy committee over the pace of consumer demand and the strength of the housing market.

The Engineering Employers' Federation said it was deeply disappointed that the MPC had opted for no change. "This is a missed opportunity to boost business confidence and give short term support to a manufacturing sector which remains firmly depressed," said Stephen Radley, its chief economist. "With inflation so low and real interest rates relatively high, manufacturers will find it hard to understand the reluctance to countenance any further reductions in interest rates."

Official figures released yesterday showed manufacturing production dropping at an annual rate of 6.4% in December, the worst performance since August 1991, when Britain was in the depths of recession.

The battered hi-tech manufacturing sector is bearing the brunt of the collapse in production, linked to the global slowdown and the recession in the US. Statisticians said output from the electrical and optical equipment sector fell 5.2% quarter on quarter, as business investment collapsed in the US and the eurozone. There were also significant declines over the quarter in the basic metals and metal products sector, where output fell 4%, and the transport equipment sector, which saw a 3% decline. Overall, factory output fell by 0.5%in December, its fourth consecutive drop.

The squeeze on manufacturing intensified in the final three months of 2001. Manufacturing output was down by 1.7% between the third and fourth quarters, and was lower in December than in 1995. Engineering output was down by almost 4% on the quarter, and by 13% over the year as a whole.

Industrial production - which includes mining, quarrying and energy as well as manufacturing - was down by 2.1% on the quarter and by 4.7% on a year earlier.

The Confederation of British Industry's chief economic adviser, Ian McCafferty, said yesterday that with job losses across the economy set to accelerate, an interest rate cut would have helped prop up consumer demand at a crucial time.

"We recognise that a small cut in interest rates is not the only solution to pulling manufacturing out of recession," he said. "However, with inflation clearly under control and signs of the slowdown spreading to consumer services, a rate cut would have injected some much needed confidence across all sectors."

The CBI's upbeat view about inflation was backed up last night when the British Retail Consortium said prices in the shops fell by 0.4% in January as hot competition in the annual winter sales prevented stores from taking advantage of strong consumer demand to widen margins.

Bill Moyes, the BRC's director general, said: "These figures continue to support our view that the recent buoyant sales are not creating inflation in the high street. It would be a great mistake for the MPC to feel under pressure to start raising interest rates just yet."

However in the City, most analysts believe that the MPC's rate-cutting spree is at an end, and that the next move in borrowing costs will be up. "If there was to be a final cut by the Bank of England then this was the most obvious window of opportunity," said Danny Gabay, of JP Morgan. "Instead, we would see this as a confirmation that the easing cycle is over, and that the next move in rates will be up."