Risk of recession to keep rates on hold

THE BANK of England's monetary policy committee is expected to keep interest rates on hold when it meets this week, amid growing evidence that manufacturers are crashing into recession because of the strong pound and the high cost of borrowing.

Economists are now convinced that rates have peaked. Twenty out of 24 economists surveyed on Friday expect rates to remain unchanged in August. A similar number now think rates have peaked and that the next move will be down.

Expectations of a rate standstill hit sterling last week after the CBI warned that manufacturing confidence had slipped to its lowest level for more than seven years. There are signs that the slowdown is now spreading to the more dominant service sector, slowing growth as a whole and raising the risk of recession.

Further evidence of the slump in manufacturing is expected to emerge this week. The latest survey from the Chartered Institute of Purchasing and Supply (CIPS) tomorrow is expected to show that manufacturing activity contracted for the fourth straight month in July. Government figures on Wednesday, meanwhile, are expected to show that manufacturing output was unchanged in June after falling 0.4 per cent in May.

The slowdown is spreading as manufacturers cancel services such as consultants and equipment hire to cut costs. A separate survey from CIPS on Wednesday is expected to show that growth in service-sector activity slowed for the fourth consecutive month.

Nevertheless, economists say the Bank of England faces a dilemma as it strives to meet the inflation target of 2.5 per cent. Its main concern remains wages, which are growing well above the rate that the Bank says can be sustained without triggering higher inflation. Meanwhile, borrowing on credit cards and demand for home loans rose to record levels in June, the Bank said last week.