Pound's fall persuades City the Bank will not cut rates

Investment banks in the City of London have swung away from forecasting a cut in interest rates by the Bank of England tomorrow.

A survey of 38 economists in the Square Mile by Bloomberg News showed 20 expect the Monetary Policy Committee to leave the base rate unchanged at a 48-year low of 3.75 per cent. Just a week ago 24 out of 32 economists quizzed by Reuters forecast the Bank would cut rates by a quarter-point.

The shift in opinion was supported by a survey yesterday that showed the service sector resumed growth in April as the war in Iraq wound down. But the deciding factor for many analysts was the impact of the depreciation of sterling against the UK's main trading currencies.

The Bank is now finalising its key quarterly inflation forecasts, which will be published next week and which will form the intellectual basis for its decision on interest rates tomorrow.

The pound has fallen 5 per cent since the Bank's forecasts in February, when it outlined it was expecting sterling to reverse its losses. The minutes of last month's MPC meeting showed the Bank believes the depreciation would add between a half and a percentage point to inflation.

Philip Shaw, the chief UK economist at Investec, who changed his view late last week, said the pound's fall was the largest to occur between inflation reports since they were established 10 years ago. "The Bank's fears over the effects of a fall in the currency have almost approached paranoia," he said.

Opponents of a rate cut were handed more ammunition yesterday by the Chartered Institute of Purchasing and Supply (Cips), which said the services sector returned to growth in April after contracting in March. But Cips said uncertainty over the economic outlook remained widespread and worry about the severe acute respiratory syndrome (Sars) outbreak led many executives to defer business decisions again.