Manufacturing industry won a much-needed reprieve yesterday as the Bank of the England left interest rates on hold and the pound tumbled on the foreign exchanges.
The Bank's Monetary Policy Committee opted keep the base rate unchanged at 6.0 per cent despite new figures pointing to record growth in the consumer economy. Business groups and trade unions praised the decision and called on the Government to take action to help drive the value of sterling down.
The City had, by a small majority, expected a hike and traders reacted swiftly by marking sterling down against the world's major currencies. The pound plunged close to a four-year low against the dollar, falling to $1.5359 or its lowest since August 1996. It also weakened against the euro, retreating more than 1.25p from record peaks of 56.79p set earlier yesterday. Sterling's index against its main trading partners dived to 111.6 from 14-year highs of 113.6 at the start of trading yesterday.
The Confederation of British Industry hailed the outcome as the "right decision", saying it would boost long-term growth. "This should not be seen as a postponement of an inevitable rise, but as a signal that interest rates have peaked," said chief economist Kate Barker.
The Engineering Employers Federation said the Government should help drive down the pound. "The Government seems to regard its role as nothing more than an innocent bystander." But Sir Ken Jackson, head of the engineering union, AEEU, said ministers were in a difficult position: "The Government does not have a magic wand."
The Bank issued no statement with its decision but analysts said sterling's strength against the euro played a major part in the MPC decision.
Recent GDP data showed growth slowed sharply in the first quarter, with manufacturers struggling to compete as the pound raised the price of exports and made imports cheaper.
But there are worrying signs of inflation in the domestic economy, especially in the labour and housing markets and in the services sector. This was confirmed by figures from the Bank yesterday showing mortgage lending rising at its fastest rate on record. Mortgage loans in March rose £4.13bn, the largest leap since records began in 1993.
Analysts anticipate only one more quarter-point hike this year. Roger Bootle, of Capital Economics, said those forecasting rates peaking at 7.5 per cent were "whistling in the dark". He said the Bank was "acutely aware" of mounting pressure on the Government to act over the pound, by direct intervention or by using the gilt markets.
"If it were seen to be pushing up rates willy-nilly, it would know it was running the risk of a political response that may not be helpful," he said.Reuse content