By Ashley Seager
LONDON, Feb 7 - The Bank of England's Monetary Policy Committee on Thursday left British interest rates steady at 4.0 percent for the third month running, as was widely expected.
But the decision was immediately slammed by hard-pressed manufacturers who have just suffered their worst year for a decade due to collapsing overseas markets, figures out earlier in the day showed.
"This is a missed opportunity to boost business confidence and give short-term support to a manufacturing sector which remains firmly depressed," said Stephen Radley, chief economist at the Engineering Employers' Federation.
"With inflation so low and real interest rates relatively high, manufacturers will find it hard to understand the reluctance to countenance any further reductions in interest rates," he added.
But the MPC is also having to contend with a booming housing market and strong consumer spending, which it stoked with seven interest rate cuts last year to their current 37-year low in a bid to insulate the world's fourth largest economy from the recessionary winds sweeping the planet.
It appears to have succeeded -- the British economy grew around 2.4 percent last year and outperformed every other Group of Seven economy in the process. It looks likely to repeat that this year, thanks largely to the strength of consumer spending as well as increased government spending.
All but one of 29 City economists polled by last Friday had predicted the MPC would leave the cost of borrowing unchanged this month.
As a result financial markets showed little reaction to the announcement. The FTSE 100 index of leading shares remained seven points up on the day at 5,081 while the pound was steady at $1.41 and 61.4 pence to the euro.
Gilts and short sterling interest rate futures remained in negative territory, having reacted to stronger than expected German manufacturing output data earlier in the day.
RATES HEADED HIGHER LATER THIS YEAR
Many economists think rates have troughed at the current level and will head higher later this year, especially if the world economy picks up. But they also think the futures market is too hawkish in thinking rates will be up to 5.0 percent by the end of the year.
That is because underlying inflation, or RPIX, is currently at just 1.9 percent and is likely to go lower in the coming months. The MPC has a government-set target of 2.5 percent for RPIX and an undershoot is considered as bad as an overshoot.
So although house price inflation has accelerated to its highest level since the housing boom of the late 1980s, according to Halifax figures released on Wednesday, and consumer spending shows no real sign of abating, the MPC need be in no hurry to raise rates.
It is also mindful that manufacturing, which accounts for a fifth of national output, remains deeply in recession.
Official data released earlier on Thursday showed output in December 6.4 percent lower than a year earlier, the worst performance since 1991, when the whole economy was suffering its worst recession since World War Two.
The hard-pressed sector shed nearly 150,000 jobs last year in a bid to remain competitive. Domestic appliance maker Dyson added to the gloom this week with an annoucement it would move 800 jobs to Asia in a bid to cut costs.
But, overall, unemployment remains close to record lows of just over three percent because the buoyant services sector -- which depends far more on domestic than overseas demand -- has created jobs almost as fast as manufacturers have cut them.