CBI drops calls for rates cut as production rises

THE Confederation of British Industry resisted the temptation to make its usual call for a cut in interest rates yesterday, as its latest survey of manufacturers showed factory output is rising - and is expected to continue - at its fastest rate for five years.

Sir David Lees, chairman of the CBI's economic affairs committee, said the 18 members were unanimous that rates should not be cut, to keep any future increase off for as long as possible. But the survey also showed that fears about the strength of demand are now the biggest barrier to investment.

Sir David said the survey showed recovery was continuing, but it still disappointed most City economists. The net balance of manufacturers who said they were more optimistic than four months ago fell from 27 to 13 per cent - the first fall in a decade for this time of year. Optimism usually rises by 15 percentage points between January and April.

Peter Warburton of Robert Fleming Securities said the survey was 'downbeat', with the change in optimism suggesting recovery in manufacturing would slow.

The CBI said the smaller rise in optimism reflected nervousness about consumer spending after tax rises. The change in the timing of the Budget also meant the boost to optimism after pre-Budget uncertainty came in January rather than April.

Sir David said the most disappointing facet of the survey was the small number of manufacturers planning to raise their investment in plant and machinery. The number of companies operating below full capacity rose, despite a sharp rise in output in recent months.

The survey also showed that manufacturers still expect to continue shedding jobs in the next three months. Average unit prices are expected to fall in the next few months while unit costs remain unchanged, suggesting a squeeze on profit margins. The CBI said there was little or no upward pressure on inflation from manufacturers.

Optimism among exporters rose for the second successive quarter, but at a slightly slower rate than in January. This was consistent with a report by NCM, which has 80 per cent of the British export credit insurance market. For the third quarter in succession, NCM reported a fall in the amount of bad debts and late payments by foreign importers of British goods. NCM said this pointed to signs of recovery in Continental Europe.

The surveys had little impact on the markets, while US data gave mixed signals on the economy there.