It's a stay of execution, say businesses as MPC leaves rates at 5.25%

It's a stay of execution, say businesses as MPC leaves rates at 5.25%

Businesses were last night bracing themselves for a May increase in borrowing costs, seeing yesterday's pegging of interest rates by the Bank of England as merely a "stay of execution".

For the third month running, the Bank's monetary policy committee held rates at 5.25%, a decision greeted with relief by retailers, estate agents and small businesses. But the UK's leading employers' groups, the CBI, the EEF, the British Chambers of Commerce and the Institute of Directors, said there was a strong possibility of a quarter-point rise next month after the Bank of England has completed its quarterly health check of the economy.

Sterling dipped slightly on the foreign exchanges after the MPC decided against a fourth increase in lending costs since August 2006, but the pound's falls were limited by the feeling it was just a question of time before the MPC moved again.

"There are signs of renewed vigour in the economy, with continued growth in consumer spending," said Richard Lambert, director-general of the CBI, "which means that a rate rise is not out of the question next month."

Roger Bootle, economic adviser to Deloitte, said: "Today's decision by the MPC to leave interest rates unchanged at 5.25% is a short stay of execution as it is extremely likely that interest rates will be raised to 5.5% next month. And interest rates may have to rise further thereafter."

Since the last MPC meeting, the annual inflation rate rose from 2.7% to.....continued below

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2.8%, taking it further from Gordon Brown's 2% target. Although the Bank believes inflation will drop back during 2007 as last year's hefty increases in energy bills are not repeated, a sizeable minority of City analysts had been expecting a rate rise. They cited evidence that firms were passing on higher costs to their customers and the strength of the housing market as reasons for the "hawks" on the MPC to press for dearer borrowing. There was speculation last night the minutes of the MPC meeting, due out in a fortnight, will reveal a knife-edge vote in favour of no change.

Adam Lent, the TUC's head of economics and social affairs, said: "A rise in rates is almost certainly on the cards, but the MPC was right not to act before studying the Bank of England's own inflation report, due out next month. With UK manufacturing looking a little shaky and housing pressures easing slightly, waiting a month was the most sensible option."

Figures from the Office for National Statistics showed output from Britain's factories fell by 0.6% in February. Back-to-back cuts in production in the first two months of 2007 meant the first quarterly drop in output since the end of 2005. This was seen by analysts as evidence that higher interest rates and the strong pound were starting to have an impact.

Factory output was down by 0.2% in the three months to February. The ONS said there were across the board cuts in production, with most sectors of manufacturing reporting that output was down and a particularly marked decrease of 1.3% in the transport equipment industries.

Industrial production, a broader category that includes mining, quarrying and energy output as well as manufacturing, was down by 0.2% in February and by a similar amount over the quarter.

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