Rates left on hold as industrial recession deepens

The Bank of England brushed aside pleas from industry and unions to cut interest rates yesterday despite new figures showing that last year was the worst for manufacturers in a decade.

The Monetary Policy Committee decided to leave interest rates unchanged at 4.0 per cent. It issued no statement to justify its decision, which had been widely expected.

While the financial markets and most independent analysts believe the next move for rates is up, business groups condemned the Bank for a "missed opportunity" and reiterated their plea for a quarter-point cut.

The Engineering Employers' Federation said it was "deeply disappointed" rates had not been cut. "With inflation so low ... manufacturers will find it hard to understand the reluctance to countenance any further reductions in rates," said its chief economist, Stephen Radley.

But the British Chambers of Commerce disagreed, saying a rate cut would have "damaged" manufacturing. "If consumer demand gets out of control then the Bank would have to clamp down [on] what is the one source of growth – domestic demand," said Ian Fletcher, its chief economist.

Their argument was boosted by official figures showing manufacturing output plunged 0.5 per cent in December. The drop meant manufacturing contracted 2.3 per cent in 2001, the largest annual fall since 1991.

National Statistics, which produced the figures, said the decline was widespread with 10 of the 13 subsectors registering a fall. There were significant falls in hi-tech industries such as mobile phones and IT equipment.

Computer makers' output rose for a second month but Mark Williams, an NS statistician, said it was not a reason for optimism. "I would not say that this is a turning point," he said.

Economists in the City said some MPC members would have used the industrial recession and lack of inflationary pressures to argue for a rate cut. Inflation is currently running at 1.9 per cent compared with the Government's target of 2.5 per cent, factory gate inflation is falling at the fastest pace on record and the British Retail Consortium said shop prices fell 0.44 per cent in January.

Next week the Bank publishes its quarterly Inflation Report.