Rate setters heed warning

The Bank of England left interest rates on hold at 4% for the ninth month in a row yesterday as downbeat news from manufacturers underlined the fragility of global economic recovery.

Markets on both sides of the Atlantic declined sharply after survey evidence showed that the tentative upturn among British manufacturers ground to a halt in July, while their US counterparts saw the pace of recovery slowing.

The nine-member monetary policy committee of the Bank of England responded to the darkening economic outlook by leaving interest rates at their 38-year low, as industry groups began calling for a cut in borrowing costs to boost ailing manufacturers.

"The US and eurozone economic recoveries are far from secure while the UK's manufacturing recovery is in danger of stopping almost as soon as it started," said John Monks, general secretary of the TUC. "The Bank must be ready to cut interest rates next month to stabilise the economy and support manufacturing."

In Frankfurt, the European Central Bank, announced that it would leave the euroland borrowing rate unchanged at 3.25%.

Activity in Britain's troubled manufacturing sector contracted in July for the first time in six months, according to the monthly Purchasing Managers' Index, which fell to a worse than expected 48.9, from 50.6 in June.

The detail of the survey showed order books, employment and export orders all down, while the cost of materials rose, leaving manufacturers little hope of climbing back into profitability.

"There was absolutely nothing in this report to cause any cheer," said Michael Hume, an economist at Lehman Brothers.

Analysts said the news raised the threat that a renewed decline in manufacturing output could drag global growth into a second downturn, creating a so-called "double dip".

"With the headline [PMI] index falling again in July, the underlying weakness looks to be more acute than we had first thought," said Ciaran Barr of Deutsche Bank. "This raises concerns that we may be witnessing the onset of a second dip in growth."

In the US, the Institute for Supply Management reported an unexpected slow down in the pace of manufacturing expansion. Its headline index fell to 50.5, the lowest level since January, and just above the crucial 50 no-change mark.

Together with the threat of a fresh financial scandal in the US, fears of further economic gloom sparked a sell-off in both London and New York.

The FTSE index of leading shares had its eighth worst day ever in percentage terms, closing down 201.7 points, or 4.8%, at 4,044.5.

Banks led the decline, after Barclays announced worse than expected financial results. Its shares fell 8.6% to close at 447p, while Lloyds TSB lost 8.4%, and Royal Bank of Scotland was down 9.2%.

On Wall Street, the Dow Jones had lost 2% by early afternoon. "The market's basically afraid of a double-dip recession," said Todd Clark, head of listed trading at Wells Fargo Securities.

The pessimistic mood was exacerbated by rumours that executives at computer group Cisco Systems were refusing to sign off the company's accounts and might resign. Cisco's share price was down more than 8% by late morning in New York.