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Thursday, 7 March, 2002, 12:48 GMT
UK rates kept at 4%
The rate remains unchanged
Interest rates are to stay unchanged, the Bank of England has said, amid signs that UK manufacturing may finally be pulling out of its long slump.


A further cut in rates would help (manufacturers) to look ahead with a little more confidence

Stephen Radley
EEF chief economist
Strong consumer spending also made the bank reluctant to cut rates any further.

Manufacturers reacted cautiously to the decision, saying vigilance was still needed and there was still room for another cut.

House prices are still booming, with a survey from the Halifax bank showing that February prices were, on average, 17% higher than a year earlier.

Low interest rates have helped prop up property prices by making mortgages cheaper, stemming the gradual slowdown which many commentators were expecting.

Untouched

The bank's previous decisions to leave rates unchanged - after seven cuts last year to help kickstart the economy - have been based on worries about the UK's two-speed economy.

Could manufacturing be turning the corner?

While the public keeps spending - in the process helping the UK avoid the worst of the downturn which has hit both continental Europe and the US - industry is still struggling against the strong pound and the after-effects of years of neglect.

Some indicators have started to suggest that demand for products from the manufacturing sector is beginning to pick up.

But the improvements are only modest.

Stephen Radley, chief economist at the Engineering Employers' Federation, said: "Manufacturers have not yet turned the corner but are peering round it, looking for signs of recovery.

"A further cut in rates would help them to look ahead with a little more confidence and in time to reverse the current slump in investment."

Balance shifting

Ian Fletcher, chief economist with the British Chambers of Commerce, echoed the feeling that there was still scope for a cut.

"The speed and extent of recovery abroad remains very speculative and uppermost in the Bank's considerations should be to maintain consumer spending power at home," he said.

Nothing seems to be able to stop the UK consumer

However, some analysts backed the decision, and said they anticipated rates would rise later this year.

Ross Walker, an economist at the Royal Bank of Scotland, said: "When you look at the housing market, consumer confidence, consumer credit, overall the consumer side doesn't need any further monetary stimulation.

"From that side of things there's no case for any further easing and over the next few weeks the balance will shift towards a rate rise, which we don't expect until August."

Pay freezes to cope with last year's downturn have tempered wage rises, so easing inflation fears, while the distortion caused in previous years by City financial workers' bonuses was muted by widespread layoffs and cutbacks in the financial sector.

Growth is set to "ease back slightly during the first half of 2002" while inflation is set to settle "below target over the next year or so" before rising back to 2.5% "by the two-year horizon", according to projections.

See also:

07 Mar 02 | Business
UK wealth gap yawns wider
20 Feb 02 | Business
Two voted against UK rate freeze
13 Feb 02 | Business
Bank plays down inflation rise
07 Feb 02 | Business
Eurozone interest rates unchanged
07 Feb 02 | Business
Bank keeps UK rates on hold
31 Jan 02 | Business
Britain to escape recession
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