Relief as rates stay put

INTEREST rates will not be raised this month, the Bank of England's Monetary Policy Committee announced yesterday, in a decision which put it under the most intense scrutiny it has experienced since its creation last May.

The announcement brought relief to home-buyers but got a grudging welcome from industry. Businesses and unions, which had lobbied vigorously against a rate rise, called for the Bank to go further and declare it would not increase the cost of borrowing in future either.

Ian Peters, deputy director general of the British Chambers of Commerce, said: "The Governor of the Bank of England must now send a clear signal that interest rates have reached their peak."

Kate Barker, chief economist at the Confederation of British Industry, said: "It would have been better news still if the Bank of England had indicated that there was now a good chance that the next interest rate move would be downward."

The MPC's meeting was bound to be controversial because of the strength of the pound, which many people blame on the level of interest rates. Sterling's climb during the past two years has slowed down export growth, putting manufacturers under increasing pressure.

Ken Jackson, general secretary of the Amalgamated Engineering and Electrical Union, called for the House of Commons Trade and Industry Committee to investigate the strong pound.

"One third of manufacturing was wiped out during the recession of the 1980s. The same will happen again if rates rise further," he predicted.

The reaction in the financial markets to the MPC's announcement was muted. The pound was almost unchanged against the German mark while the sterling index edged 0.1 lower to 107.3. Shares continued their upward trend, the FTSE 100 index climbing 50 points to 6,105.5.

City experts disagreed about whether borrowing costs should rise to cool the pace of overall growth and keep inflation on target, but most were sceptical about whether a statement of intent from the Bank would make any difference to the pound.

Roger Bootle, chief economist at HSBC Markets, welcomed the decision yesterday. But he said: "I'm not at all convinced that it's that easy to manipulate expectations in the financial markets."

Ciarn Barr of Deutsche Morgan Grenfell, one of the City hawks who reckons the Bank might now have to tighten policy next month, said: "People looking for a rate cut are in for a long wait. We're miles away from that."

The eight-person MPC has been split since January, and the latest published minutes revealed the Governor had to use his casting vote in favour of no change in February. The split has been presumed to be four-four since then, but minutes of yesterday's meeting will not be released until mid- May.

The inflation forecast in the Bank's quarterly Inflation Report next month is thought to be critical to future prospects for rates. February's report said another increase in borrowing costs was more likely than not.

Outlook, page 21 Diane Coyle, page24

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