British and Euro interest rates left on hold

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The Independent Online

THE BANK of England left interest rates unchanged at 5.25 per cent yesterday, to the great relief of industry. But economists warned that the Monetary Policy Committee (MPC) had only postponed the inevitable.

THE BANK of England left interest rates unchanged at 5.25 per cent yesterday, to the great relief of industry. But economists warned that the Monetary Policy Committee (MPC) had only postponed the inevitable.

Separately, the European Central Bank became the third central bank this week to keep interest rates unchanged for the time being - after the US Federal Reserve and Bank of England - in a decision that sent European stock markets racing ahead in the afternoon.

In the UK, the FTSE 100 ended nearly 103 points higher at 6,200.4. The pound lost half a cent against the dollar immediately after the MPC's announcement, and the sterling index ended 0.5 down at 104.9.

Business organisations and unions welcomed the news, having urged the Bank not to squeeze the interest-rate trigger again after September's surprise rise. The pound has gained 1 per cent since that quarter-point rise, a climb that experts said probably explained the MPC's decision yesterday.

According to businesses, there is no sign of inflationary pressure, while the high exchange rate is hurting exports.

Ian Peters, deputy director general of the British Chambers of Commerce, said: "We can sustain more growth without inflation in the current economic climate." Sir Ken Jackson, general secretary of the engineers union, went further, saying loan rates should be cut to help exporters. Many economists, on the other hand, warned that interest rates would have to rise again in the next few months. Martin Weale, head of the National Institute for Economic and Social Research, said: "The MPC has simply postponed the day. If sterling had not risen there would have been no doubt of the need for a rate rise this time." Kevin Gardiner of Morgan Stanley said: "The case for a rate rise is clear cut. "

The strength of the recovery has led to expectations that UK rates will continue upward. But manufacturers fear the prospect of an increase in loan costs will keep sterling painfully high. "The strong pound is dramatically important in some parts of the economy and more or less irrelevant in others, especially in the services sector," said David Miles, Professor of Economics at Imperial College.

The Office for National Statistics said it would launch a monthly index of output in the services sector, a move that had been identified as a top priority by the Treasury and Bank of England.

Wim Duisenberg, the ECB president, said yesterday there was still a "tightening bias" towards higher rates in Europe, but clearer evidence would be needed before a move up from the current 2.5 per cent.

Hawkish words from his deputy, Christian Noyer, this week, which led the markets to expect an increase, had been "mistranslated", Mr Duisenberg claimed. Mr Noyer had said: "It would be better to act in time, proactively, rather than doing so too late and in a rash and hasty way."

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