Rate pressure eases as retail and industry suffer slowdown

Retail and industrial lobby groups united yesterday to call on the Bank of England to ignore the feverish housing market and leave interest rates on hold later today.

Figures out yesterday showed that manufacturing, engineering and retail sales all suffered a slowdown last month. The gloomy news contrasted with Monday's Halifax survey that showed house prices surged by an all-time record of 4.2 per cent in May.

The reports, on top of a mixed batch of figures since its last meeting, leaves the Bank with the task of tackling a booming housing market and a manufacturing recession.

Most economists in the City – 24 out of 28 according to the most recent poll – expect the Bank's Monetary Policy Committee to leave rates on hold at their 38-year low of 4.0 per cent when it announces its decision at noon.

The case for no change was boosted by yesterday's figures. The high street boom cooled down last month, according to the latest survey from the employers group CBI. It said the balance of retailers reporting a growth in sales volumes almost halved to 25 per cent from April's 57 per cent.

"All the evidence in [the] survey points to a gradual slowdown in consumer spending," said Alastair Eperon, the chair of the CBI's survey panel. "There is no necessity for the Bank of England to increase interest rates [today]." The Engineering Employers' Federation, which published a gloomy economic survey yesterday, agreed. Stephen Radley, its chief economist, said: "The MPC must continue to ignore the clamour for higher rates from those who see inflation lurking round every corner and wait for concrete evidence of a strengthening recovery before acting."

Its survey showed output and orders fell over the latest three months for the fifth successive quarter. Engineering companies plan to cut another 90,000 jobs this year compared with 70,000 in 2001 and few have any intention of investing in their companies.

The TUC urged the Bank to resist "siren calls" for a rise, saying the cost of borrowing had to be frozen to stem the thousands of job losses being lost in manufacturing every month.

Meanwhile, a survey of managers in manufacturing companies that showed industry's tentative recovery faltered in May due to concerns over the global economic outlook. The index compiled by the Chartered Institute of Purchasing and Supply showed that the pace of growth slowed last month, defying forecasts of a further increase.

The other key economic data this month was also mixed. The latest revision of economic growth in the first three months of the year showed the economy stagnated for the second quarter in a row.

Meanwhile, average earnings for February were revised sharply higher and growth in consumer borrowing and retail sales in April was exceptionally strong. "The decision over whether to hike in June looks like a close call," Michael Saunders at Salomon Smith Barney said. "On balance, we go [just] for a hike in June."

David Hillier, chief UK economist at Barclays Capital, said: "Despite all of this, we do not think the first rate increase will come in June because a majority of the committee will still be concerned about the sustainability of growth around the rest of the world."

Even if the vote goes in favour of no change the minutes of the meeting, which are published in two weeks' time, could show at least one vote for an increase in interest rates – the first since September 2000.