Bank took rates decision without key evidence of industry slump

The Bank of England decided to keep interest rates on hold last week just hours before learning that official estimates of economic growth would have to be revised sharply downwards, it emerged yesterday.

News that manufacturing output had slumped 5.5 per cent in June ­ its worst fall for 23 years ­ arrived at Threadneedle Street too late for the Monetary Policy Committee's vote to keep rates at 4 per cent.

Yesterday the Office for National Statistics said its initial estimate that the economy grew 0.9 per cent in the second quarter would have been revised down to 0.6 per cent had it had the figures.

A statistician at the ONS said yesterday: "We have taken the unusual step of saying this because June came out a lot lower than we expected. These figures were produced at Thursday lunchtime. They did not get to the Bank in time. They did not see these figures."

The Bank made no comment yesterday and City economists are now keenly awaiting tomorrow's press conference with its deputy governor, Mervyn King, that accompanies publication of the Inflation Report.

The revision is likely to throw fresh doubt over the path for interest rates although economists were divided over the impact the manufacturing data would have.

The sharp fall was driven by the two-day Queen's jubilee bank holiday, which the ONS admitted had had a much greater impact on working patterns than it had expected, although it could not quantify it.

The largest impact was in the motor industry, which saw a monthly fall in output of 10 per cent. One factory shut for 10 days, another for seven, while four shut for between two and five days.

In the City John Butler, UK economist at HSBC, said that while the jubilee has distorted the figures, there were signs that it was part of a wider global slowdown.

Much of the boost in production earlier in the summer had been destined for US markets, he said. "My worry is that we now know much of this went on inventories rather than sales. If this is now being unwound it will surely hit the prospects for UK manufacturing," Mr Butler said.

Economists said July could see a rebound as factories reopened after the shutdown. However, ONS figures show that a similar 4.9 per cent fall in the month of the silver jubilee in 1977 was followed by a meagre 1.6 per cent rise.

Meanwhile a snapshot survey of the services sector showed that growth levels moderated in July. Business optimism had now slipped to "the lowest seen so far this year" due to increased pessimism within financial services, the Chartered Institute of Purchasing and Supply said.

Business organisations called on the Bank to keep their options open to cut rates. Martin Temple, the director-general of the Engineering Employers' Federation said an industrial recovery could not be "taken for granted".

Martin Essex, a senior economist at the consultants Capital Economics agreed, describing the figures as "truly shocking". He said: "There could be a rate cut before there is an increase."

The Trades Union Congress went one step further, calling on the Bank to cut rates.

The news dealt a fresh blow to the fragile confidence on the London stock market. The FTSE 100 index closed below 4,000, falling 79 points or 2 per cent to 3,996.