Upset as Bank pegs interest rates

The Bank of England disappointed industry and homeowners yesterday by leaving interest rates unchanged amid tentative evidence that the economic slowdown may have pulled out of its recessionary nosedive.

Breaking a sequence of five reductions in the cost of borrowing since October, the bank's monetary policy committee voted to leave rates on hold at 5.5 per cent. The decision coincided with figures showing a marginal pick-up in high street sales in February and rising business confidence in the service sector as a whole. But with the economy still in danger of slipping into recession, most City analysts believe further rate cuts are likely in the months ahead.

'After you have had five months of aggressive cutting, there comes a time when you have to take a breather,' said David Walton, of Goldman Sachs, the US investment bank. 'I certainly don't think that this means we have reached a trough in rates.'

He pointed to the risk that output would be depressed by firms slashing production to get rid of a backlog of unsold stocks and the likelihood that inflation would undershoot the Government's 2.5 per cent target as reasons for further monetary stimulus.

Although the decision to leave rates on hold had been widely anticipated, union and business leaders were critical of the move.

Kate Barker, chief economic adviser at the Confederation of British Industry, said: 'Many firms will regret the Bank's decision . . . Despite signs that the UK economy is no longer deteriorating, prospects remain highly uncertain.'

Roger Lyons, general secretary of the Manufacturing, Science and Finance union, accused the bank of ignoring the plight of industry, which has borne the brunt of the economic slowdown.

'The monetary policy committee is gambling with thousands of quality jobs in the manufacturing sector,' he said.

However, Ken Jackson, general secretary of the Amalgamated Engineering and Electrical Union, was more conciliatory.

'Recent cuts have helped industry and what is important is that the overall trend is downwards,' he said. 'We would like to see rates closer to the European level by the end of the year but we understand you cannot do it in one go.'

The bank gave no reason for its decision. But its quarterly inflation report, published last month, said rates at 5.5 per cent were consistent with hitting the inflation target.

Since then, the economic data have been mixed, with a downward revision to gross domestic product growth and easing pay pressures offset by a bounce in consumer confidence and evidence that the global economic situation has stabilised.

The less gloomy international outlook was reflected in yesterday's survey of the service sector by the Chartered Institute of Purchasing and Supply which showed optimism rising to an eight month high.

'Improved confidence could be largely attributed to reduced fears of recession in the UK following recent cuts in interest rates, stronger growth overseas and the steadying of world financial markets since the crises last Autumn,' said the CIPs. However, the economy's fragility was underlined by a continued downturn in new business, prompting service sector firms to cut employment for the third month in a row, and at the fastest rate since 1996.

The CBI's distributive trades survey, also published yesterday, showed two per cent more retailers had experienced sales growth in February than a decline in business, up from a negative balance of minus 9 per cent in January.