We are likely to see another cut before the year is out to pre-empt the expected downturn of UK plc

Charcol's Ray Boulger

Business leaders have been calling for a cut in interest rates in order to try and help the sector out of its recent difficulties, exemplified by plunging stock markets.

London's leading index of shares, the FTSE, fell nearly 100 points on Thursday morning, hitting levels last seen three years ago.

But the strength of consumer spending and the housing market has made the bank cautious about stoking inflationary pressures by cutting rates.

The decision to keep rates on hold was widely expected by analysts and share traders, with the FTSE index edging slightly deeper into its gloom to close 111.7 points lower at 5,204.3.

Industry in trouble

The latest data shows that manufacturing output fell 0.9% in July to stand 3.0% lower than last year, the worst annual performance since January 1992.

Industrial production - which includes mining and energy production - also fell, chalking up its worst annual performance since September 1991.

The Bank missed an opportunity to help support UK economic activity and prevent a more widespread loss of business confidence

CBI

There is increasing evidence that this slowdown is now spreading to the service sector.

And the International Monetary Fund has added to the gloomy sentiment by revising down their forecast for the growth of the UK economy to 2%, according to a leaked report in the FT.

Missed opportunity?

The Confederation of British Industry (CBI) was quick to criticise the decision, commenting that the bank had missed an opportunity to stop the slowdown spreading.

The CBI said that, while it was not surprised by the decision, it felt the Bank should have acted to support UK economic activity and stop falling confidence spreading beyond the manufacturing sector.

What UK manufacturing needs most is a pick-up in global demand, fledgling signs of which are emerging

Ian Fletcher, BCC

And the CBI also dismissed the Bank's worries over inflation.

"With prospects for inflation continuing to be benign, a cut wouldn't have posed a significant risk to the Bank's inflation target," said Ian McCafferty, the CBI's chief economic adviser.

But the British Chambers of Commerce (BCC) says that an interest rate cut would not have had a long term impact on the economy in any case.

"A further cut this month would have given temporary comfort to manufacturing, but offered little towards solving the wider imbalances in our economy," said Ian Fletcher, chief economist at BCC.

The BCC says that the health of the UK manufacturing sector is much more dependent on global demand, and hints that an upturn could be on its way.

"What UK manufacturing need most is a pick-up in global demand, fledgling signs of which are emerging following recent activity by the European Central Bank and the US Federal Reserve.

Divided committee

Last month the Bank's Monetary Policy Committee (MPC) surprised many people by cutting the UK's base rate by a quarter point to 5%.

It was the fourth rate cut the Bank had made this year.

But minutes of the meeting showed the MPC was split over the decision, raising the likelihood that there will be no change this time around.

Analysts felt the last rate cut showed the Bank was willing to allow the consumer sector to grow strongly to help offset the slowdown in manufacturing.

And they correctly surmised that the Bank would pause before its next move.

Spend, spend, spend

New evidence of the strength in the consumer sector came on Wednesday when figures from the Confederation of British Industry (CBI) showed High Street sales growing at their fastest rate for five years.

Also this week, surveys from the Nationwide building society and Halifax bank have shown UK house prices still growing at a rapid rate, although both companies expect the rate of growth to start slowing.

"Our view is that it will be the autumn, maybe October or November, before we see the next cut as the consumer economy is still looking too strong," said Alex Scott, fund manager at Barclays Stockbrokers.

And the mortgage brokers Charcol also predicts a further cut, saying that last month's cuts from the US Federal Reserve and the European Central Bank provides additional stimulus.