London, July 5 (BridgeNews) - The Bank of England's Monetary Policy Committee on Thursday left its key U.K. lending rate unchanged at 5.25%. The decision had been widely expected. Economists had predicted that the MPC would be too concerned about the strength of the consumer sector to make the rate cut that struggling manufacturers have demanded.
The MPC issued no statement about its decision, leaving it until the publication of the minutes of the meeting on Wednesday July 18 to reveal how it deliberated and voted. However, the economic data over the past month has served only to heighten the MPC's policy dilemma, with the manufacturing sector struggling while the consumer sector shows every sign of becoming even more buoyant.
The U.K. economy is caught between weak overseas and strong domestic demand, with the latter preventing a rate cut. Analysts were largely unmoved by the MPC's decision. Brian Hilliard, economist at SG (Societe Generale), said: "As expected. I don't expect any change for several months until we see how the imbalances pan out in the economy. At this stage it is premature to look for rate increases."
Ross Walker, economist at the Royal Bank of Scotland, agreed, saying: "Widely expected. Our forecast is for rates to stay on hold at 5.25% for the rest of this year and then to start rising in Q1 next year. There is a two-tier economy. If the bank cuts rates to help manufacturing it risks creating an inflationary consumer boom. In the June minutes there was a switch back to focusing on the domestic economy rather than the downside risks from overseas.
Recent data (such as)...very strong retail sales are likely to mean that bias will be maintained. I think there was a good chance (MPC member Sushil) Wadhwani would have voted for a cut but (an) 8-1 or 9-0(vote) was the most likely outcome."
But the no-change decision was sharply criticised by the Engineering Employers Federation, which issued a strongly-worded condemnation of the MPC.
EEF Director-General Martin Temple, said: "We are extremely disappointed with today's decision and the failure of the MPC to take the same bold, decisive action as the US Federal Reserve. This is not an issue about manufacturing or services, but rather of ensuring against the deteriorating conditions in industry spreading to the rest of the economy. "With the global economy slowing at the second fastest rate ever, the UK cannot remain immune. Sooner or later the MPC will be forced to cut interest rates again."
Meanwhile the CBI said that while it understood the situation the MPC was in, it believed that the committee could have safely cut rates again. John Cridland, Deputy Director-General, said: "We understand the dilemma facing the Bank of England, given that confidence remains high among consumers.
But many sections of industry are coming under increasing pressure from the global slowdown and an interest rate cut now would have been timely in helping to mitigate its effects.
"With wage settlements remaining subdued and the pound strengthening against the euro, a cut in interest rates today would not have threatened the inflation target."