Manufacturers plead for interest rates freeze

Manufacturing leaders issued an 11th-hour plea to the Bank of England not to raise interest rates this week in the face of speculation that a move is now a foregone conclusion.

The Engineering Employers' Federation said a premature increase - the first since February 2000 - could kill the fragile business recovery in its infancy. The EEF, which represents manufacturers employing a million people, said higher rates could spark a damaging rise in the pound's exchange rate.

Stephen Radley, its chief economist, said: "The upturn in manufacturing remains hesitant and recovery hopes will take a blow if higher rates lead to further strengthening against the dollar and the euro.

"We urge the [Bank] not to increase rates at the next meeting but move forward cautiously, keeping a close eye on currency movements."

Economists believe that only the rise in the pound, which has gained 3 per cent since the last rate meeting, and rises in fixed-rate mortgages, can avert a rise. Brian Hilliard, director of research at SG, said: "If by some chance the monetary policy committee does not act this week, the exchange rate movement might be cited as a reason for delay."

Only 6 out of 43 economists polled by Reuters expect rates to stay on hold. The majority believe record borrowing and rising house prices, as well as strong data on economic growth and retail sales, will prompt a quarter-point rise.

But there is a divergence in views on what will happen next. Most believe the sheer size of the debt mountain will prevent the Bank from raising rates too far or too fast in case it triggers a crash.

"The Bank will want to judge the reaction of the housing market and the consumer to changes in policy," said Ciaran Barr, chief UK economist at Deutsche Bank.

But Michael Saunders, a European economist at Citigroup, said rates could rise as high as 5.5 per cent by the end of 2005. "A rise in rates to 4 per cent would still leave policy far from neutral," he said. "Such a loose stance can only be sustained over time if the MPC is having to offset severe downside risks to growth."