Interest rates held after pleas from industry

The Bank of England bowed to mounting pressure from Britain's hard-pressed manufacturing sector yesterday when it ignored the booming economy in the south-east and left interest rates on hold.

Industry breathed a sigh of relief after the Bank announced that its nine-strong monetary policy committee had decided to peg rates at 6% after four increases in the previous six months. Homeowners were also relieved to see the steady rise in mortgage rates, which stand at 7.4%, level off.

Ian Peters, deputy director general of the British Chambers of Commerce, said the tightening of policy since the autumn had put severe pressure on manufacturers and exporters. "The MPC must not raise interest rates further unless there is clear evidence of real inflationary pressures in the economy," he said

The TUC's general secretary, John Monks, said: "The strong pound is proving almost too much for many struggling businesses, all of whom will be hoping that no change is the order of the day for some way to come."

City analysts said the decision suggested that the Bank had been told by the treasury's representative at the meeting that a rise was unnecessary because the budget on March 22 would keep a tight grip on the public finances to prevent inflation from rising.

The Bank's announcement had been widely predicted in the City after speeches by the Bank's governor, Eddie George, and his deputy, David Clementi, highlighting the way a strong pound keeps the lid on prices.

Some analysts believe borrowing costs may now have peaked but most say they will rise further in the months ahead. "I think going forward, strong consumer demand can still mean that rates go up," said Michael Metcalfe, economist at NatWest.

Kate Barker, the CBI's chief economic adviser, said: "Keeping rates on hold will give exporters some breathing space. Yesterday's manufacturing data was a clear indication that firms are not out of the woods." Figures released by the office for national statistics on Wednesday showed manufacturing output had slumped by 0.4% in January, confounding expectations of a small rise.

Analysts say the main threat to the inflation outlook is the tight labour market, where earnings growth has accelerated to 5.5%, well above the 4.5% limit that the Bank regards as comfortable.

However, the Bank is aware that the figures may have been artificially boosted by one-off millennium bonuses, which suggests the need for caution before raising rates again.

The housing market is another worry but the Bank may have taken comfort from recent figures from the Halifax showing a fall in prices in February. The impression that the housing market may be cooling off has been reinforced by the Bank's own data, which shows a sharp slowdown in new mortgage approvals in recent months.

Darren Winder, economist at stockbroker Warburg Dillon Read, is one of the minority of City analysts who say the Bank has already done enough to prevent inflation rising above the government's 2.5% target.

"The manufacturing data on Wednesday, taken together with other recent indicators, suggested that quarterly GDP growth peaked in the third quarter of 1999.

"Any further tightening of monetary policy can therefore be expected to be reversed either in the latter part of this year or the early part of next year."