Plunging pound keeps rates on hold

Industry and union leaders criticise Bank's decision <br/>* ECB also fails to heed calls for eurozone cut
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Business and trade union leaders condemned the Bank of England for failing to cut interest rates yesterday as economists said any move could now be months away.

Business and trade union leaders condemned the Bank of England for failing to cut interest rates yesterday as economists said any move could now be months away.

The Bank said its monetary policy committee of economists had decided to keep the base rate unchanged at a 48-year low of 3.75 per cent.

The Bank issued no statement but City economists said next week's inflation report would show the Bank was worried about the inflationary threat from the plunging pound.

But business leaders said the Bank's decision was a mistake given the mounting evidence of economic slowdown and the threat to the recovery from the hikes in national insurance and council tax.

The Engineering Employers' Federation – representing an industry that is losing 90,000 jobs a year – said the decision was "suspect". Martin Temple, its director general, said: "The timing of this decision is out of line with most of the evidence showing the economy weakening further."

David Frost, the head of the British Chambers of Commerce, said: "We are disappointed that the MPC felt unable to act more forcefully, to counter the growing threat of weak domestic and external demand and worsening business prospects."

The Confederation of British Industry, which repeatedly called for a rate cut before yesterday's meeting, said it was disappointed. "We will look to the Bank for a rate cut next month," said Ian McCafferty, its chief economist. "The recent fall in sterling is unlikely to pose a significant risk of higher inflation given the weakness of demand."

Brendan Barber, the TUC's incoming general secretary, said a rate cut would have given the UK "added insurance against worldwide recession".

The decision came as little surprise in the City of London, where opinion was split down the middle over whether the Bank would take action.

But the news hit the markets, where traders had been hoping for a cut to boost corporate earnings. The FTSE 100 index fell 64 points, or 1.6 per cent, to close at 3992.

Advocates of a reduction said it had been needed to tackle the slowest economic growth for a decade, signs of an end to the housing and spending booms and the collapse of consumer and business confidence in Europe.

But others seized on the fall in sterling, which has tumbled by more than 6 per cent since the February inflation report and hit a six-year low on Wednesday.

This, coupled with the boost to growth from the falling oil price and tentative signs of a "Baghdad bounce" after the end of the Iraqi war, would have encouraged the MPC to adopt a "wait and see" stance, they said.

Adam Cole, senior economist at Credit Agricole, said the chance of a rate cut before the next inflation report in August had "diminished significantly".

"The MPC has shown a persistent tendency to shift rates in inflation report months," he said. "Unless we get a considerable weight of evidence to the contrary, we would expect to see today as signalling the bottom of the rate cycle."

The European Central Bank also kept rates on hold yesterday, but – in contrast to the UK – opened the door to a further cut by adopting a looser inflation target.

The decision to keep its main rate at 2.5 per cent came as little surprise, despite a run of poor data out of the eurozone, because of a series of strong hints by senior ECB officials.

The ECB shifted its framework for setting monetary policy, saying it would aim to keep inflation "close to" 2 per cent, rather than below that level – a move that in effect widens its strict view on inflation.

Wim Duisenberg, its president, said: "This clarification underlines the ECB's commitment to provide a sufficient safety margin to guard against the risk of deflation."

Lorenzo Codogno, an economist of Bank of America, said it was a small but positive change. "Rates are likely to remain low for a somewhat longer period of time," he said.