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

The Bank's Monetary Policy Committee has kept the cost of borrowing at four 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.

Despite signs of an upturn for the struggling manufacturing industry, figures on Wednesday revealed a 0.8 per cent drop in output in March.

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

The CBI and the British Chambers of Commerce both welcomed the decision to peg rates, but TUC general secretary John Monks called for a cut, saying: "Having consistently undershot their inflation target and with manufacturing still struggling to turn the corner, the only movement now should be downward."

"The recovery is still at a very early stage, despite 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, added: "Although the case for raising rates in mounting, we believe the Bank is correct to postpone that decision.

"The MPC should not be trying to second guess whether manufacturing recovery is on a firm footing when, with inflationary pressures still very subdued, it has the luxury of time to judge this more soundly."

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."

The MPC slashed interest rates from six per cent to four per cent last year in a bid to shield the UK economy from the worst of the global slowdown.