UK rates remain stable

The Bank of England has kept interest rates on hold for the fourth month in a row.

The Bank is right to avoid a knee-jerk reaction to signs of a weaker pound

Ian Peters, BCC

At the end of the monthly meeting of the Monetary Policy Committee (MPC), the Bank's base rate - which sets the trend for interest rates across the economy - was left at 6%.

A month ago, the high value of the pound had been a factor in the Bank's decision not to raise interest rates.

Since then, sterling has dropped significantly, easing the pressure on manufacturers exporting their goods, but raising new fears for inflation over the higher costs of imported raw materials.

Reaction

Ian Peters, Deputy Director General of the British Chambers of Commerce, said: ''The Bank is right to avoid a knee-jerk reaction to initial signs of a weaker pound.

"Sterling remains above a level at which UK manufacturers and exporters can compete effectively, and this is having damaging knock-on effects across the wider economy.

So many sectors need more time to increase productivity and regain export markets

Digby Jones, CBI

''With strong signs that the economy is slowing, sterling's recent depreciation does not pose an inflationary threat. Intense competition continues to exert downward pressure on prices.

''In the current economic climate we would want to see sterling down to a level well below three Deutschmarks before countenancing any increase in interest rates.''

Digby Jones, director general of the Confederation of British Industry, said: "Business is pleased at the news.

"So many sectors need more time to increase productivity and regain export markets.

"Raising interest rates would have dashed hopes of a further fall in the value of the pound at the time when there are few signs of inflation."

Sir Ken Jackson, general secretary of the Amalgamated Engineering and Electrical Union, said: "A rise would have been damaging.

"The next step is a fall in the pound to ease pressure on exporters."

John Monks, general secretary of the TUC, said: "Manufacturers trying hard to stay afloat will be relieved.

"Although in the long term rates must begin to fall again, a stretch of stability is the best bet for this struggling sector."

Slow-down

Some analysts expected the MPC to be most concerned about unexpectedly weak total output (GDP) figures for the first three months of the year and pessimism over the prospects for manufacturing.

New evidence that the UK economy is slowing down came this week when the Halifax announced that house prices had fallen by 0.4% in May. It was the second lender to announce a fall.

In the past month, the pound has dropped back as interest rates have continued to rise in other countries, especially in the US.

Some members of the MPC have argued that a weaker pound is inevitable, given the widespread belief that sterling has been overvalued.

This suggests it would be better for the economy if sterling were allowed to weaken sooner rather than later.

But others on the committee take the view that sterling's strength is vital to keep the price of imported goods down.

The latest official figures show that inflation remains subdued. The underlying rate, which excludes mortgage payments, fell to a record low of 1.9% last month, well below the Bank's 2.5% target.

New members

Two new members attended the Monetary Policy Committee meeting for the first time this month.

Professor Steve Nickell and Christopher Allsopp have replaced Professor Charles Goodhardt and Willem Buiter, the outspoken MPC member who resigned to join the European Bank for Reconstruction and Development.

Mr Allsopp was recently criticised by a House of Commons Treasury Select Committee, which urged the Chancellor to reconsider his appointment.

In its report, the Committee said members "were disappointed in his answers to our questions, and believe that this casts doubt on whether he possesses the skills required" to sit on the MPC.

But that was rejected by Gordon Brown, who has no statutory obligation to follow their advice.

Professor Nickell, who impressed the Committee more, is a labour market specialist - and deciding whether wages are rising too fast will be one of the key tasks facing the MPC.