The pound fell against the euro and dollar yesterday, adding to widespread relief among industry that the Bank of England had decided to keep interest rates on hold.
The decision knocked the dollar down by almost a cent and the pound fell against the euro. But experts in the City said the Monetary Policy Committee had probably come to a split decision, which meant that yesterday's freeze was a pause rather than a peak in rates.
Industry and trade unions, which had piled on the pressure on the Bank not to raise rates above 6 per cent, welcomed the outcome. "For this relief, much thanks," said John Monks, general secretary of the Trades Union Congress. "Manufacturing is already facing enough problems without having to cope with higher rates and an even higher pound."
The Confederation of British Industry praised the Bank for its decision. Its chief economist, Kate Barker, said: "For some firms, another rise could have been the last straw."
Analysts said the high pound - and its impact on the manufacturing sector - played a major part in the MPC's decision. Senior committee members have made a succession of speeches expressing their concern and official figures on Wednesday showed an unexpected fall in manufacturing output.
Recent data have shown a fall in house prices for the second month running, a sharp drop in retail sales and an agreement by Opec that could lead to a fall in the oil price. On the other side of the equation, wages are rising sharply and the services sector is expanding rapidly. But analysts said it was still unclear what impact last month's Budget would have on monetary policy. The Government and the Bank have said it supported tightening monetary policy but a number of commentators have said the extra cash for the NHS and the lack of tax rises on consumers will stimulate demand.
Ian Peters, deputy director general of the British Chambers of Commerce, said: "This can only prove a reprieve until the MPC has considered fully its verdict on the inflationary consequences of the Budget."
Digby Jones, the director-general of the CBI, last night condemned the Chancellor for refusing to act to help industry. "With no mention of sterling or the challenges facing exporters in his 50-minute Budget speech, manufacturing is not even on the Chancellor's radar screen," he told the East Midlands CBI.
City economists were unanimous in saying that rates will still need to rise to dampen down inflationary pressures from the domestic economy, probably to 6.5 per cent by the end of the year.
Michael Saunders, at Salomon Smith Barney, said the MPC would probably wait until May when it produces its quarterly inflation report. "The MPC prepare a more detailed economic forecast and that may be the time to judge the Budget, post-Y2K trends and other economic news in context," he said.
David Hillier, at Barclays Capital, said the MPC could delay again in May, especially if the fall in industrial output leads to a downward revision in quarterly GDP.
In the currency markets, the pound fell as low as $1.5808 against the dollar, which had been as high as $1.5890 before the decision. Sterling's trade-weighted index fell slightly to 108.8, 1.5 per cent below the 14-year highs of 110.5 reached in February.