The clamour for lower interest rates must be resisted at all costs

The Bank of England should have raised interest rates yesterday. Its decision to leave them unchanged was praised by the wrong people for the wrong reasons. Digby Jones, director general of the Confederation of British Industry, said a rise "would be a straw looking for a camel's back". Good soundbite; bad judgement. John Edmonds, leader of the GMB general union, used a different but equally mistaken analogy: "This is merely a stay of execution. British manufacturers and exporters are still sitting firmly on death row."

Of course, the pound is too high and the euro too low. Currency markets have a tendency, every few years or so, to overshoot. The increasingly strange attitude of the markets to the euro suggests that that may be happening at the moment. No matter what happens, including a rise in euro interest rates, foreign exchange dealers seem to take it as a reason to push the single currency lower. That kind of sentiment is likely to turn sooner or later, but it is a steely gambler who says when.

Meanwhile, setting interest rates to try to influence the exchange rate is a mug's game. Nigel Lawson tried to shadow the German mark and produced boom and bust. John Major and Norman Lamont tried to hold the pound in the Exchange Rate Mechanism and humiliated themselves. Until Britain makes a firm commitment to join the euro - which would be a good idea but seems unlikely for a while yet - our interest rates should be set purely on the basis of domestic inflationary conditions.

Of course, too, the crisis at Longbridge highlights the pain in the manufacturing export sector. Despite that, the British economy as a whole is growing too fast and the dangers of inflation are too real. Wages and house prices are rising, and not just in the South-east. The failure to raise interest rates by a quarter-point yesterday is all too likely to mean that rates will have to stay higher for longer than they otherwise would.

Just because the CBI and trade unions agree on something does not make it so; both have memberships skewed towards manufacturing. And what is it that Mr Jones and Mr Edmonds agree on? A return to the good old days of tolerating a little inflation as a price worth paying for keeping people in work in the short term? "It matters whether we have a steel industry and whether we can make cars," Mr Edmonds declared. No. What matters is whether we have companies that make profits, whatever their business - interest rates cannot be set for specific sectors.

It is simply no use, either, the manufacturing unions or bosses complaining that the pound is too high. Becoming competitive in the world economy is not a one-off change; it is a constant struggle. What was manufacturing industry doing when the pound was low from 1992 to 1996? Not investing enough, not preparing itself enough for the next challenge.

Even if Gordon Brown announced his intention to join the euro as soon as possible, which might bring the pound down, that would not remove the pressure on British manufacturing to invest and innovate. On the contrary, it would lock Britain into the rest of the European economy without any prospect of the easy way out through devaluation, which is what both sides of industry seem to be calling for today. The clamour for lower interest rates must be resisted and reversed.