UK rates kept on hold

The Bank of England's Monetary Policy Committee (MPC) has left UK interest rates unchanged at 5.25%.

Manufacturing is suffering, there are signs that it may well have a technical recession.

Trevor Williams
Lloyds TSB

The decision was widely forecast, and widely supported, by economists.

"This is the right decision and they can now wait and see how the international situation develops, particularly in the US and Europe," said Michael Hume of Lehman Brothers.

Analysts also cited strong political and economic reasons for staying put.

Any rate cut might have given Prime Minister Tony Blair a last-minute boost ahead of Thursday's general election.

This might have led to the bank being accused of political partiality.

Troubled industry

But not everyone was happy.

The bank is taking an unnecessary risk when the global economic outlook is so uncertain.

Ian Brinkley
Trades Union Congress

"This is a disappointing decision," said Ian Brinkley, senior economist, Trades Union Congress.

"British manufacturing badly needs a cut in rates to restore confidence".

"The bank is taking an unnecessary risk when the global economic outlook is so uncertain," he said.

Consumers buoyant

But, on balance, most economists saw few economic reasons for cutting interest rates at the moment.

The risk is that if the MPC eases too much it might exacerbate the trade deficit which is already at a record.

Trevor Williams
Lloyds TSB

"Manufacturing is suffering, there are signs that it may well have a technical recession," said Lloyds TSB's Trevor Williams.

"But despite that the consumer side of the economy remains very strong... and the risk is that if the MPC eases too much it might exacerbate the trade deficit which is already at a record," he said.

A rate cut would also have posed a slight inflation threat, although for the moment inflation is below the government's 2.5% target.

Unemployment continues to be low as well, suggesting that the economic downturn in the United States may not have had a major impact on the UK yet.

"In a nutshell, I think that the MPC has had enough justification from domestic numbers to pause in cutting interest rates," said Bank of America's chief economist Jeremy Hawkins.

He said there was still some room to cut rates, but added that "there's no immediate pressure on them to do so".

Jonathan Loynes of Capital Economics said: "The data have been strong enough over the last month to keep the MPC's finger clear of the rate trigger."

'Decided' services slowdown

So far this year, the Bank of England has cut interest rates three times, from 6% to 5.25%.

Some analysts expect further cuts later in the year.

A quarterly survey published on Monday by the Confederation of British Industry (CBI) and Deloitte & Touche observed a "decided slowdown" of the country's all-important service sector.

This survey was seen by sceptics as an early warning signal that the global economic slowdown is beginning to take effect in the UK as well - although the US and the eurozone appear to be worse off.

In a recent speech, the Bank of England governor Sir Edward George said the MPC was seeking to "offset these dampening external influences by encouraging sustained growth of the domestic environment through reduction in interest rates".

In the neighbouring 12-country eurozone, the European Central Bank recently cut rates to 4.5% from 4.75%.

In the US, the Federal Reserve has reduced rates five times this year, by half a percentage point each time, bringing interest rates to 4% from 6.5%.