Interest rates left on hold amid conflicting signals

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The dilemma facing the Bank of England over whether to raise interest rates next month was highlighted yesterday by figures showing a robust rise in manufacturing but a sharp fall in house prices.

The Bank's Monetary Policy Committee left rates on hold at 4.5 per cent yesterday for the 11th month in a row.

It has moved rates just once - back in August 2004 - in the past 23 months, making it the longest period of stability since the 1950s. But traders are betting that the MPC will end its unbroken run as soon as next month.

Advocates of the need for a tightening in monetary policy received a boost from official figures showing that factory output rose by 0.5 per cent in May.

The rise was driven by a hefty growth at computer factories and pharmaceutical plant, which have now overtaken the aerospace industry to be the largest sub-sector in manufacturing.

"Given the rise in inflationary pressures internationally, rates should have been raised today," said Martin Weale, the director of the National Institute for Economic and Social Research.

However, the improvement was offset by a 1.5 per cent fall in the output of public utilities and North Sea energy fields.

This left production sector output up just 0.2 per cent on the quarter. Even if the sector grows 1.0 per cent in June, its contribution to second quarter GDP would be close to zero compared with a positive input of 0.16 percentage points in the first quarter.

This could leave GDP growth at 0.6 per cent, well below the Bank's forecast of 0.9 per cent.

"There remains a strong case for rates to remain unchanged for the next few months at least," said Howard Archer at Global Insight.

There was fresh ammunition for rate "doves" from figures showing house prices suffered an average price fall of 1.2 per cent or £2,200 in June - its biggest fall in five years.

This followed three hefty rises between February and April. "It adds to the mounting evidence that house prices have recently lost momentum," Mr Archer said.