The Bank of England left interest rates unchanged yesterday as official figures showed that manufacturers had enjoyed their best month in seven.
The outcome of the meeting of the Bank's Monetary Policy Committee had been unanimously expected but did little to stem calls for a cut in rates if the economy continued to remain sluggish.
"Waiting too long before taking corrective action could be dangerous and cause long-term damage," said David Frost, the director general of the British Chambers of Commerce.
City analysts had expected the MPC to leave the base rate at 4.5 per cent after a series of figures showing an upturn in the housing market, a surge in services activity and glimmers of hope on a high street recovery.
There was more upbeat news yesterday from the industrial sector, with official figures showing manufacturing expanded by 0.4 per cent in December, its best out-turn since April.
The growth, which followed falls in the previous two months, was driven by record output of engines and turbines and of weapons and ammunition. Industry experts said the latter was driven by demand from the US, which is heavily engaged in Iraq.
However, manufacturing looks almost certain to post its first annual decline since 2002 unless December's figures show an unprecedented 7.7 per cent jump.
James Knightley, the UK economist at ING Financial Markets, said: "The trend overall is still weak, which will keep GDP below trend and in turn help to diminish inflationary pressures. Consequently we still feel there will be scope for rate cuts."
The MPC has voted for no change on rates since August when it ordered a cut on a five-to-four vote - the tightest possible margin on the nine-person committee.
In December one member, Stephen Nickell, voted for a rate cut, defying the other eight, on fears that inflation would undershoot its target.
However, the upbeat data since then has unsettled some of the City economists who had expected that a cut in rates was only a matter of time.
Alan Castle, the UK economist at Lehman Brothers, said: "We are increasingly nervous about our call for a quarter-point rate cut in February, even if we are not ready to throw in the towel." Philip Shaw, the chief economist at Investec, said he was certain rates were on their way down. "Continued sluggish growth should mean the next couple of years see a degree of disinflation, justifying lower interest rates," he said.
Matters will be further complicated for City forecasters by the departure of Sir Andrew Large, a Bank deputy governor, from the MPC at the end of the month. Sir Andrew, widely perceived as a hawk, will be replaced by Sir John Gieve, a career civil servant.
In stark contrast, the European Central Bank sent a strong hint that it was preparing to raise interest rates as it decided to leave monetary policy unchanged yesterday. Jean-Claude Trichet, the ECB's president, said the bank would monitor prices "very closely", a sign that it might raise interest rates in March, analysts said.Reuse content