Bank freezes rates but US woes signal cut may be imminent

Fresh fears that the United States was on the brink of a double-dip recession triggered speculation of another round of interest rate cuts just hours after the Bank of England left UK monetary policy on hold.

The Bank resisted calls for a cut from manufacturers and retailers and instead kept the base rate on hold at a 38-year-low of 4 per cent for the tenth month in a row. The decision had been widely expected but was greeted with dismay by business groups that had argued a cut was needed to avert a downturn in the UK.

The Engineering Employers' Federation said it was disappointed by the decision. "The Bank had room to reduce rates and a quarter-point cut would have helped prevent the recovery weakening further," Stephen Radley, its chief economist, said.

The British Retail Consortium and Trades Union Congress had also called for a cut and the Confederation of British Industry urged the Bank to "stay alive" to the need for a cut if there was fresh bad news.

But Ian McCafferty, its chief economist, added: "What business needs most is stability, so the Bank is right to hold until it is clear that yet lower rates could be sustained for a considerable period."

Economists were divided over whether UK rates would rise or fall next time but many said that the answer was likely to be determined by the fate of the US economy.

Philip Shaw, chief economist at City bank Investec, said: "I think the global environment is sufficiently fragile to get the Bank thinking about cutting rates. We are looking for cuts in October or November."

The gloom was compounded by a sharp slowdown in the US non-manufacturing sector. It posted its slowest growth since January, the ISM survey of businesses showed. The weak out-turn, combined with news that US chain stores had had their worst month since September 2001, triggered another fall on Wall Street.

The markets will now focus on key US employment data out today. Mark Cliffe, chief economist at ING Financial Markets, said: "If that is weak it will greatly increase speculation about a rate cut at the next Federal Reserve meeting or indeed ahead of the meeting."

There was little respite from the gloom in the eurozone, with German unemployment hitting a three-year high and orders for its manufactured goods posting an unexpected fall.

Mr Cliffe said the focus was on the threats from a tumble on the stock markets or the outbreak of war with Iraq. "I would be very surprised if the Fed and the Bank did not have an immediate game plan for Iraq or the stock market that would be pre-emptive action," he said.