Bank holds interest rates as recovery hopes recede

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The Independent Online

The Bank of england kept interest rates on hold at their historic low of 0.5 per cent yesterday, as signs grew that the economy is continuing to "flatline", jeopardising hopes of anything like a vigorous recovery, as well as calling into question the Chancellor's projections for jobs and public borrowing and his ambition to "rebalance" the economy.

The independent National Institute for Economic and Social Research, (NIESR), which enjoys an enviable record for the accuracy of its forecasts, said it estimated that the economy grew by just 0.1 per cent in the period from April to June – and even contracted fractionally last month.

Following a net nil economic growth rate between September and March this year, the economy seems set for a prolonged period of stagnation during this quarter and beyond.

The NIESR said: "The effects of one-off events in April have depressed the overall quarterly growth rate. However, even accounting for these factors, the underlying rate of growth is still likely to be weak."

"These figures do not provide a picture of economic growth that would support a tightening of monetary policy at this juncture."

Official data from the Office for National Statistics confirmed that the manufacturing revival – which has driven the recovery so far – is also running out of momentum.

While manufacturing posted a superficially strong rise in output of 1.8 per cent in May, much of that was merely a catch-up from the production lost during April because of the extended bank holidays and disruption after the Japanese tsunami.

On a quarterly basis, manufacturing is down 0.2 per cent on the previous three-month period, offering little evidence that the much-vaunted "rebalancing" of the economy towards manufacturing and exports is being sustained.

Overall, industrial production – manufacturing plus mining, North Sea oil and quarrying – rose by 0.9 per cent in May, offsetting the 1.7 per cent decline in April caused by special factors.

"To meet the Office for Budget Responsibility's estimate of 1.7 per cent economic growth for 2011, GDP would need to rise by 0.9 per cent in both the third and fourth quarters of the year. This is looking increasingly implausible given the weak domestic market and the recent downturn in global economic growth, which has caused export growth to stall," Chris Williamson, the chief economist at Markit, said.

Angela Eagle MP, Labour's shadow Chief Secretary to the Treasury, added: "It's time this Conservative-led government realised that without strong growth it will be much harder to get the deficit down."

A Treasury spokesman said: "We've always maintained that the recovery will be choppy, given the scale of the imbalances in the economy and depth of the recession, as well as rises in global commodity prices and recent turbulence in the eurozone.

"You only have to look at what has happened to countries who have lost control of their finances to see why having a credible fiscal policy is a pre-requisite for growth, investment and jobs.

"The Budget set out a plan for growth backed by the IMF, OECD and G20."

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