Bank leaves rates unchanged

THE BANK of England left interest rates unchanged at 5.25 per cent yesterday, surprising nobody but disappointing manufacturers and unions.

However, the Monetary Policy Committee left the way open for future rate cuts. Unusually, it issued a statement with its announcement, saying inflation would probably undershoot the 2.5 per cent target if the pound's exchange rate did not decline.

"In those circumstances, depending on other developments in the economy, there might therefore need to be further easing of interest rates," the statement said.

The pound did fall slightly after the decision. But few experts believe the Bank can do much to influence the exchange rate.

"The MPC is trying to keep a cap on sterling but the upward momentum is probably unstoppable," said Roger Bootle of the consultancy Capital Economics. The improvement in the economy meant there was little scope for further reductions in borrowing costs, he said.

A new survey yesterday revealed a surge in activity in the service sector last month. The expansion was the strongest since June, optimism bounced to a 14-month high, and both costs and prices charged increased for the second month running, according to the monthly purchasing managers' survey.

In its statement the MPC said there were "encouraging signs" of recovery. But the decision to leave rates unchanged was criticised by many in industry who described it as a missed opportunity.

Ian Peters of the British Chambers of Commerce said: "The Bank is dithering while business struggles to build on a fragile recovery."

Roger Lyons, general secretary of the Manufacturing Science and Finance union, said: "We will count every job loss during the summer and will not let the Bank forget its mistake."