Rates held at 4% as fears mount over fragile recovery

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The Independent Online

The Bank of England left interest rates unchanged at a 38-year low of 4.0 per cent yesterday amid fears that the emerging economic recovery was still extremely fragile.

The decision, which was widely forecast by City economists, was greeted with relief by business organisations.

The Monetary Policy Committee issued no statement, but next week the Bank publishes its closely watched quarterly inflation report.

This will contain fresh forecasts for growth and inflation that provide the best guide for the Bank's thinking on the next move for interest rates.

Yesterday's decision came just a day after official figures showed manufacturing output slumped 0.8 per cent in March, its worst for a decade.

The fall, which was much greater than expected, triggered fears that even the anaemic 0.1 per cent GDP growth in the first quarter might soon be revised away.

The Engineering Employers' Federation said the "fragile" economic recovery needed to take hold. "We applaud the Bank for giving the recovery a chance to take root before acting," said Stephen Radley, its chief economist.

Ian McCafferty, chief economic adviser at the CBI, the largest employers' group, said there was little sign of inflationary pressures, saying: "The Bank can afford to leave rates at the current level for sometime to come."

Although official data have been weak, analysts have been alarmed by the strength of business surveys that point to a strong corporate recovery around the corner.

Optimism among manufacturers is at an eight-year high according to the CBI, whose survey of retailers found activity at levels not seen since the 1980s boom.

But Ian Fletcher, chief economist at the British Chamber of Commerce, said: "There have been improvements in confidence but in the case of many firms, this has yet to translate into firm orders."

The financial markets believe the Bank will hike rates soon to control the consumer economy, although they are pricing in a quarter-point hike by June compared with a half-point at the start of April.

Figures from the British Retail Consortium yesterday showed shop prices rose almost 0.5 per cent in April. This took the annual rate of high street inflation to 1.07 per cent, the highest for at least five years.

Danny Gabay, UK economist at JP Morgan, said inflation would hit 3 per cent – above the Bank's 2.5 per cent target – by the end of the year.

"While this may have little bearing on today's decision, it may increasingly become an issue as we move through the year," he said.

The warning came as the European Central Bank issued fresh concern over inflation in the latest hint it is preparing to raise rates soon.