MPC urged to hold rates as economy stays sluggish

The Monetary Policy Committee is widely expected to leave interest rates unchanged at 6 per cent today, after the latest business surveys suggest the economy was weaker than expected last month because of the fuel protest.

The Monetary Policy Committee is widely expected to leave interest rates unchanged at 6 per cent today, after the latest business surveys suggest the economy was weaker than expected last month because of the fuel protest.

Business organisations called on the MPC to hold its fire, saying inflationary pressures remained subdued. However, some economists said future rate increases could not yet be ruled out, with worrying signs of price increases in the service sector. Growth in services slipped markedly last month, according to the regular purchasing managers' survey. The activity index dropped from 58.4 in August to 55.0. But this was mainly the effect of the petrol blockades, according to the Chartered Institute for Purchasing and Supply (CIPS).

The disruption also hit high street sales, the Confederation of British Industry reported. Its monthly survey showed retail sales volumes growing at their slowest pace since May 1999, but partly because some shoppers stayed at home.

A separate survey of engineering companies suggested output and orders in industry had bounced back in the third quarter of the year, after a drop in the previous three months. However, the Engineering Employers' Federation said prices and profit margins remained under intense pressure because of the strong pound.

In a submission ahead of the Pre-Budget Report, it has urged the Chancellor to extend tax credits for research and development and to increase first year capital allowances for small companies from 40 per cent to 100 per cent, to safeguard investment spending. "This would help companies with their cashflow but also send the important psychological message that Britain is a good place to invest," said Martin Temple, the EEF's director general.

The survey indicated that prices charged by engineering companies, and their profit margins, have declined. Only one company in 20 was able to increase its prices in the latest quarter. Mr Temple said this pressure on margins posed a threat to future investment.

However, the CIPS report showed prices charged by services firms, along with their costs, had risen to the highest level since the survey began in 1996. Employment in the sector, which covers two thirds of the economy, rose at the fastest pace for more than two years, raising labour costs. "Charges also rose at a record rate in September," the report said.

"There is little sign that inflation in the service sector is set to slow," said Adam Cole, an economist at HSBC, describing the price figures as "worrying".

The MPC has voted 5-4 against an interest rate increase for the past two months. This month Charles Bean, the Bank's new chief economist, takes the place of 'hawk' John Vickers.