Industry wins temporary stay on rates rise

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Leading article: The case for doing nothing now, and being unpopular later

Panic over a hike in interest rates subsided yesterday as the Bank of England joined three other European central banks to leave monetary policy unchanged. But the speculation immediately shifted to the timing of the first increase with some analysts warning that the UK's Monetary Policy Committee and the European Central Bank would raise rates as soon as next month.

The MPC decided to keep the base rate on hold at a 38-year low of 4.0 per cent for the seventh month in a row.

The ECB kept rates at 3.25 per cent, Sweden's Riksbank stood pat at 4.25 per cent while the Swiss authorities kept their rate target at 0.75-1.75 per cent.

Many believe a strong recovery in British manufacturing in figures next week could tip the balance in favour of a July increase – as could a hike by the US Federal Reserve later this month.

Details of the MPC vote will not be known for a fortnight but analysts believe the scale of the dilemma faced by the committee means the minutes will reveal the first vote in favour of a hike since September 2000.

Yesterday's decision, which had been widely forecast, was greeted with relief by both business groups and the mortgage industry. Last month's surprise surge in house prices, which rose by a record 4.2 per cent according to Halifax bank, had put the financial markets on edge about a possible hike. But the business groups including the CBI, British Chambers of Commerce and Engineering Employers' Federation had urged it not to respond to what one trade union head called "siren voices" in the City.

Ian McCafferty, the chief economic adviser to the CBI, said: "This is the right decision ... with inflation well under control. The economy remains fragile despite early signs of a pick up in manufacturing." He said there was evidence the consumer economy was beginning to cool. Yesterday, the British Retail Consortium reported prices of high street goods fell in May. On Wednesday a CBI report showed a sharp increase in retailers reporting falling sales.

Economists remained divided over the timing of what will be the first hike in two years. "Market pricing gives a clear signal that investors view the current policy as unsustainably loose," said Michael Saunders at Salomon Smith Barney, which sees rates at 4.5 per cent by September. But Don Smith at Garban Intercapital, which expects no hike before August, said: "Those looking for a trigger for a hike should not look to the housing market but to the corporate sector."