Why rates could not rise

Given all the recent signals coming from the Bank of England it would have come as a major shock indeed if its monetary policy committee had raised rates today.

True, consumers in the world's fourth-largest economy have yet to curb their appetite for shopping and house prices keep climbing. In the latest evidence of the property boom, Land Registry data today showed that house prices rose 10% over the past year, while the Confederation of British Industry last week reported the strongest growth in retail sales in 14 years in April.

But Bank officials have clung to the belief that, in time, the rise in house prices and the current spending spree will moderate of their own accord. There are some grounds for taking this line. When the latest housing figures from Land Registry - considered the most authoritative on house prices - are compared with those for the last three months of 2001, they show that house price growth has generally slowed down this year.

In any case, any prospect of a pre-emptive strike against inflation flew out of the window with yesterday's surprising figures on manufacturing output. Figures from the Office of National Statistics (ONS) showed that output slumped 0.8% in March from the previous month, the fastest rate of contraction in more than a decade.

The figures revealed the fragile nature of the recovery in Britain's manufacturing sector. Long-suffering manufacturers thought they had turned the corner when output registered a 0.4% rise in February after declining since last August. Recent surveys also showed an increase in confidence among manufacturers. But yesterday's figures from the ONS showed that the celebrations were premature.

So, with manufacturing still blighted, there was even less justification for a rise in rates that would pull the rug from under any nascent recovery among Britain's factories. In fact, manufacturing remains the major blemish on Gordon Brown's otherwise solid economic record.

Manufacturing output in the UK is still running some 2.5% below 1997 levels, when the Blair government assumed office. Even more damning, manufacturing production is lower than at any time since June 1994.

The high pound is a major drag on British factories and the chancellor's planned rise in employer national insurance contributions, which takes effect next April, will impose an additional burden on employers. The last thing manufacturers need now is higher interest rates.

But, unless house price growth starts to ease off and consumers rein in spending pretty soon, the Bank will have little choice but to raise rates to prevent a return to boom and bust.

The feeling in the City is that borrowing costs will rise next month. A month's reprieve will bring little consolation for Britain's hard-pressed manufacturers, but that is the price they will have to pay for an economy increasingly out of kilter as they suffer while consumers prosper.