Rates on hold despite prospect of manufacturing recession

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The Independent Online

The Bank of England left interest rates unchanged yesterday just hours after an unexpected slump in factory output revealed manufacturing industry on the brink of recession.

The Bank of England left interest rates unchanged yesterday just hours after an unexpected slump in factory output revealed manufacturing industry on the brink of recession.

Business organisations accepted the decision, which had been widely forecast, but said the Bank should be ready to cut rates if the business outlook deteriorated.

"Today's no-change decision is correct," David Frost, the director general of the British Chambers of Commerce, said. "But, if there are clear signs that the economy slows, the MPC [the Bank's Monetary Policy Committee] should be ready to take quick corrective action and cut rates."

It is the fifth successive month that the MPC has left rates on hold at 4.75 per cent. The Bank was silent on its reasons and analysts must wait until 26 January - the date of the first estimate of GDP growth in the last quarter of 2004 - for the publication of the minutes of the meeting.

While the City was virtually unanimous in forecasting yesterday's decision, it is split over whether the next move will be up or down. A recent survey by Reuters of 43 economists showed more than half expect a rise. Seven forecast the base rate will rise to at least 5.75 per cent.

The National Institute of Economic and Social Research estimated fourth-quarter growth at 0.4 per cent, down by 0.5 per cent in the third quarter, with annual growth of 3.0 per cent. Martin Weale, its director, said: "Despite the slow growth in the third and fourth quarters we do not see a case for an interest rate reduction. We expect growth in the current year to be at or slightly above trend rates."

Official figures showed manufacturing fell an unexpected 0.1 per cent in November, the fifth dip in the past six months. The sector contracted 0.9 per cent in the third quarter and output would have to show a 0.1 per cent rise in December to prevent a second successive quarterly decline that meets the technical definition of recession.

Analysts said yesterday's figures would depress fourth-quarter GDP. "The data are supportive of the view that the next move in rates is likely to be down and not up," Alan Castle, at Lehman Brothers, said.

Meanwhile the lack of inflationary pressure from the high street was highlighted by new figures showing prices fell in December. The British Retail Consortium said retailers were forced to cut prices to boost trading, with prices 0.6 per cent down on the month and 1.41 per cent lower than in December 2003.

Eurozone interest rates were also left on hold, at 2.0 per cent, but the European Central Bank hinted that it was prepared to loosen policy.

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