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Last Updated: Thursday, 8 May, 2003, 11:01 GMT 12:01 UK
Bank leaves rates on hold
The Bank of England's monetary policy committee (MPC) has voted to keep interest rates unchanged at 3.75%, defying pressure for a cut from the manufacturing sector

The decision comes despite weak economic expansion abroad and at home, and signs of slower growth in house prices and consumer spending.

Manufacturers, who have been hit by weak demand in their key export markets, condemned the rate freeze.

Martin Temple, director general of the Engineering Employers' Federation, said the decision was "out of line" with recent economic data.

"While the pound has fallen to a more competitive level, weakness in the world economy will keep both recovery hopes and inflation in check," he said.

The UK economy expanded by a lower than expected 0.2% in the first three months of the year.

Recent surveys pointing towards a marked slowdown in the property market and tepid consumer spending - both key determinants of economic expansion - suggest that growth may continue to disappoint in the months ahead.

Mixed signals

However, some analysts had cautioned against a rate cut this week, pointing to signs that the economy may be in better shape than previously thought.

Last week, the Chartered Institute of Purchasing and Supply (CIPS) released cautiously upbeat assessments of the manufacturing and service sectors, and the stock market has rallied strongly since the end of the war in Iraq.

At the same time, an 8% increase in the value of the euro against the pound since the beginning of the year is expected to push up the price of imported goods, boosting inflation.

Inflation is currently at a five-year high of 3% - well above the Treasury's target rate of 2.5% - although this is largely due to a temporary spike in crude oil prices in the run-up to the Iraq war.

The MPC is allowed to miss the 2.5% target rate by a maximum of one percentage point in either direction.

Disappointment

Ian McCafferty, chief economist at the CBI, said he was "somewhat disappointed," by the Bank's decision.

"I think they have held off to see how things pan out," he told BBC News 24.

He said the CBI would be pressing for a rate cut at the MPC's next meeting, citing a "cooling off" in areas, such as retail sales and housing, which were not related to the Iraq war.

The latest interest rate decision came at the end of what is likely to have been one of the MPC's most difficult meetings since it took over responsibility for setting rates six years ago.

While polls showed that a slender majority of forecasters were expecting a quarter-point cut earlier this week, nearly all said the final decision would be very close.


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