Rate standstill gives embattled exporters a break

The Bank of England yesterday heeded the pleas of manufacturers and left interest rates on hold at their 48-year low of 3.5%, after news of a widening in Britain's trade gap with the EU revealed the struggle facing exporters.

Official figures showed exports to the EU economies dropped in August to their lowest level since 1999, so business groups welcomed the "breathing space" provided by the monetary policy committee's decision.

"A period of stability is essential to allow the emerging recovery to take hold and business confidence to grow," said the Engineering Employers' Federation. Its chief economist, Steve Radley, added: "Premature action risks pushing industry back onto the rocks."

Ian McCafferty, the CBI's chief economic adviser, agreed: "The MPC must not jump too soon. Growth has been sluggish and we must not be over-hasty to hike up interest rates on the long haul to recovery. There is a danger that recovery might be choked off before it reaches a sound footing."

The fragility of the upturn was underlined yesterday by official trade figures which showed that exports to the EU fell by £700m in August. Statisticians said Britain's trade gap with the rest of the world widened to £3.6bn in August from £3bn in July. Both imports and exports of cars fell sharply, by 14% and 5% respectively.

City investors are still betting on a rise in interest rates in the coming months, after revisions to official GDP figures showed the economy grew more quickly in the first six months of the year than policymakers first thought.

After a surprise 0.6% drop in industrial output in August, yesterday's decision by the MPC had been widely expected. Analysts believe the Bank is more likely to raise rates next month, as it makes its quarterly revisions of forecasts for growth and inflation.

Simon Rubinsohn, chief economist at City brokers Gerrard, said some MPC members may have voted for higher rates yesterday.

"There is undeniably a camp which favours taking back the July rate cut now that it is clear that the fears which provoked the move were unwarranted. We still believe that the mixed economic picture and the generally benign inflation trend justify maintaining the current monetary stance for a while longer."

A report from the British Retail Consortium yesterday supported the idea that there is little inflationary pressure in the economy, with competition keeping the lid on price rises.

According to the BRC's monthly Shop Price Index, prices rose at an annual rate of 0.66% last month. "Competitive pressures on the high street remain strong. Shop prices are still rising by less than half the rate of inflation," said the BRC's director general, Bill Moyes.