UK rates on hold after economic slowdown

The Bank of England left interest rates in the UK unchanged today as figures showed a slowdown in Britain's factories and the housing market.

The decision to leave the base rate on hold at 4.5 per cent for the tenth month in a row was widely expected, although financial markets predicted an increase as the next move.

Any lingering worries that a rise could be brought forward to this month were eliminated by data on manufacturing and property prices.

Factory output fell 0.2 per cent between March and April, its worst performance since October, according to the Office for National Statistics.

The unexpected drop left output up only 0.5 per cent on the year.

One significant fall was a 2.4 per cent monthly fall in the manufacture of televisions, after two months of hefty growth that was attributed to demand for flat-screen televisions in the run-up to the World Cup.

Meanwhile, house prices in the UK rose 0.1 per cent in May, the smallest rise since January's 0.2 per cent fall, Halifax bank said.

It followed figures this week from Nationwide showing a 0.2 per cent rise.

Martin Ellis, Halifax's chief economist, said: "There are signs that housing market activity may be beginning to level out."Analysts in the City said the Bank of England was caught between signs of rising inflationary pressure and forecasts for declining consumer spending.

The National Institute of Economic and Social Research, an independent think-tank, estimated the economy grew 0.5 per cent in the three months to April.

"Seen in the global picture of inflationary pressures, this suggests that interest rates should have been raised today," Martin Weale, its director, said.

But Michael Saunders, an economist at Citigroup, said since the Bank compiled its forecasts, the exchange rate had risen 2 per cent and share prices had fallen 10 per cent.

"Those swings in asset prices, if sustained, will deliver much more restraint than a quarter-point rate hike," he said.

"With that restraint, plus the backdrop of subdued inflation and labour market slack, the Monetary Policy Committee is likely to stay on hold for an extended period."

The European Central Bank raised rates by a quarter-point but played down worries it was about to accelerate its programme of monetary tightening.

- INDEPENDENT