Rates relief for industry

Manufacturers and homeowners sighed with relief yesterday as the Bank of England's interest rate-setting committee voted to leave borrowing costs on hold, adding weight to Gordon Brown's claim that the Budget does not add significantly to inflationary pressures.

But with domestic demand still growing strongly, most City analysts expect industry's respite to be short.

Jeremy Hawkins of Bank of America summed up the mood in the Square Mile by saying: "This is likely to be just a pause, rather than a peak, in the rate cycle."

The nine-member monetary policy committee offered no explanation for its decision to leave rates unchanged at 6%. In the MPC's almost three years in existence it has moved rates more often than it has left them alone.

But the decision had been widely anticipated because of the pound's strength, which is keeping inflationary pressures at bay by choking off exports and lowering import prices.

Next month the MPC will carry out its more thorough, quarterly assessment of the inflation outlook - including a detailed examination of the Budget's impact - and this could trigger further monetary tightening.

Michael Saunders of Salomon Smith Barney Citibank said that, despite the weakness of manufacturing, growth was still too strong to prevent a breach of the government's 2.5% inflation target. "A slowdown which is chiefly dependent on weakness in manufacturing and the traded goods sector to offset strength in services and domestic demand may not be sustainable because the resultant deterioration in the current account balance may at some stage undermine sterling."

Kate Barker, the CBI's chief economic adviser, said yesterday's decision was right for manufacturers and the whole economy.