Strong pound predicted to keep rates on hold

Sterling's strength is eating into Britain's manufacturing recovery, the latest snapshot of the sector revealed yesterday, prompting predictions that the Bank of England may spare borrowers another rate rise.

Activity in the sector was at its weakest for five months, according to the Chartered Institute of Purchasing and Supply, with many firms blaming the weakness of the dollar.

"Demand for goods in overseas markets is being affected by strong currencies. Competition from imported goods is also eating into order books," said Chris Williamson, chief economist at NTC Research, which compiles the CIPS index.

The institute's activity index fell to 53.2 in February, from 55.5 the previous month, a weaker reading than City analysts had expected but still above the 50 level that indicates the sector is expanding. In recent months the survey has leapt ahead of official data, which is showing a rather weaker picture.

"February's decline is probably best viewed as a correction from unrealistically high levels rather than a harbinger of a 'double-dip' slowdown in British industry," said Ross Walker at the Royal Bank of Scotland.

Consumers are still stacking up debt at record rates, according to separate figures published by the Bank, despite two rate rises since November. But analysts said the Bank's monetary policy committee, which meets this week, was unlikely to hit borrowers with another rise this month.

"We believe the MPC will be content to hold fire on rates this week, especially given the appreciation in sterling," said Ciaran Barr, UK economist at Deutsche Bank in London.

Consumer credit surged by nearly £2bn in January, the strongest rise in eight months.

John Butler of HSBC said the Bank had two battles on its hands: calming the household borrowing frenzy without hiking rates to the point that would send industry back into recession.

The strong borrowing figures prompted a fresh rise in sterling to $1.8722, up a quarter of a percentage point from late New York levels on Friday.