THE Bank of England cheered homeowners and borrowers by keeping interest rates steady at a record 38-year low.

The Bank's Monetary Policy Committee has kept the cost of borrowing at 4 per cent in a move that was widely expected by City experts.

Most had forecast the MPC would reject a rise given the fragile nature of the economic recovery.

In spite of signs of an upturn for the struggling manufacturing industry, figures yesterday revealed a shock 0.8 per cernt drop in output in March.

Analysts had been expecting a 0.2 per cent rise and the fall meant that output levels in the month were 6.8 per cent below last year the sharpest fall for 20 years.

Simon Rubinsohn, economist at fund manager Gerrard, said of the MPC's decision: "It was entirely predictable and entirely justifiable after the weak manufacturing figures and the generally weak corporate news that we've had over recent weeks."

Industry bodies also welcomed the move.

CBI chief economic adviser Ian McCafferty said: "The recovery is still at a very early stage, in spite of expectations of improvement over the next four months.

"The lack of inflationary pressure gives the bank room for manoeuvre, if and when needed, and they can afford to leave rates at the current level for sometime to come."

Ian Fletcher, chief economist at the British Chambers of Commerce, agreed: "Although the case for raising rates is mounting, we believe the bank is correct to postpone that decision."

Most economists are predicting rates will rise during the second half of the year.

However, TUC general secretary John Monks bucked the trend and called on the MPC to cut rates.

He said: "Having consistently undershot their inflation target and with manufacturing still struggling to turn the corner, the only movement now should be downward."