Outlook: Bank's interest rate dilemma

On why cruickshank is right to refer, how to resolve the Engergy Group stalemate, and the Bank's problem with interest rates

Roger Lyons, the general secretary of the Manufacturing, Science and Finance union, grumbles that if the the Bank of England understood manufacturing it would be cutting interest rates to save jobs.

And while most business leaders accept that the realistic choice facing the Monetary Policy Committee was between no change and an increase, all were relieved yesterday that it opted for the former.

According to the speculation, however, the split was even closer than last month, with the Governor forced to use his casting vote on the side of the doves.

If the Governor's intention was to placate the likes of Mr Lyons, he failed. Yesterday's decision did nothing to ease industry's pain from the strong pound as hints of a future German interest rate cut sent sterling back above DM3.

It is quite widely believed in the industry that the MPC actually quite likes the strong pound, that the pound has in itself become a tool of monetary policy alongside interest rates. The economy has to slow to a sustainable pace of growthand this is being brought about by higher interest rates which boost the exchange rate and squeeze exports and production.

There is obviously some truth in this, but it ignores the fact that the Bank, like everybody else, would much prefer it if higher interest rates were squeezing consumer spending and the service industries as well. Then rates would not have had to climb as much and sterling might be lower. Sadly, the export squeeze might yet prove insufficient to slow growth as much as needed to hit the inflation target.

If manufacturing is feeling the chill, other parts of the body economic are still feverish, and it is the aggregate effect that will count.

More could be done fiscally in the Budget to cool the economy but this tends to be a blunt and slow instrument compared with the cutting edge of interest rates.

The strength of the pound is grim for exporters, but sterling won't weaken without clear evidence of slower growth, however that comes about, and, probably, a safe kick-off for the single currency. It is simply not in the Bank's gift to make life sweeter for manufacturers.