Rates held in face of falling markets

Pressure was mounting on the Bank of England to cut borrowing costs yesterday after its rate-setting committee shrugged off renewed jitters about the health of the world economy and left rates unchanged for the 10th month.

As the monetary policy committee began its meeting, fresh evidence of the weakness of the American economy unnerved Wall Street and sent the FTSE index of leading shares down 100 points. A late recovery saw the index finish 16 points down at 4,011.

The MPC's decision to leave rates at a 38-year low of 4% was widely expected by City analysts, but a growing number are warning that the Bank will be forced to cut rates again if the world economy continues to weaken. "We continue to believe that a combination of a subdued global recovery plus signs of a slowdown in domestic consumption will result in the committee lowering rates before the end of the year," said Philip Shaw, UK economist at Investec.

The TUC said the Bank had been "overly cautious", saying that with the world economy running out of steam and manufacturing struggling, Britain needed a cut as a safeguard against the global downturn.

Industry leaders said the Bank's caution was justified this month, but called on the MPC to monitor the economy closely for further signs of deterioration.

"The global economic recovery is in danger of losing momentum and UK consumers are now pulling in their horns," said Ian McCafferty, the Confederation of British Industry's chief economic adviser. "The Bank must stay alive to the possibility that the economy could weaken again in coming months."

Britain's high street boom has slowed in recent months, forcing retailers to cut prices in the hope of raising sales. Yesterday the British Retail Consortium reported high street prices were up only 0.62% from a year earlier.

"If spending slows, the economic impact could be serious. The dangers of inaction are now greater than the dangers of action. The MPC should cut interest rates," said the BRC's Bill Moyes.

Fears that Britain 's fragile recovery might be checked by renewed weakness in other big economies were underlined yesterday afternoon in a report showing that the slowdown in the US has spread from manufacturing into the service sector.

Growth among the service companies - which make up 80% of the American economy - eased in August for the third month in a row, according to the Institute for Supply Management. Its August index of non-manufacturing activity fell to 50.9 in August, just above the 50 level that marks the borderline between boom and bust.

"The ISM non-manufacturing index adds to the evidence that the US economy's recovery from recession is proving to be a slow and painful one," said Martin Essex, a senior economist at Capital Economics.

A string of anaemic data has raised concerns in the markets about the health of the US economy and prompted a renewed slide this week in shares. In late trading yesterday, the Dow Jones index of leading shares was off 95 points at 8,329.

"The whole tone of economic reports is soft," said Richard Cripps, chief market strategist at Legg Mason Wood Walker. "You are not getting a lot of interested buyers. The mood is pretty despondent. It's a waiting game - waiting for a bullet to be fired in the Middle East, waiting for profits to get started and waiting for economic news that shows the economy isn't double dipping."