Chances of increase in interest rates shrink as output falls

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The Independent Online

The faint prospect of a rise in interest rates today all but disappeared after an unexpected fall in manufacturing output yesterday confirmed that industry remains deeply mired in recession.

The faint prospect of a rise in interest rates today all but disappeared after an unexpected fall in manufacturing output yesterday confirmed that industry remains deeply mired in recession.

Economists and industrialists were virtually unanimous in predicting the Bank of England will keep rates on hold when the monthly meeting of the Monetary Policy Committee ends at lunchtime.

They also said that the gloomy figures were a further blow to the Chancellor Gordon Brown's forecast of 2 to 2.5 per cent growth for the economy as a whole this year.

The 0.4 per cent fall in industrial output in March and the much steeper 0.8 per cent decline in manufacturing output took the City by surprise and confounded recent survey evidence from the CBI and other business groups pointing to a sharp recovery in activity.

The fall in manufacturing output in March took the year-on-year decline to 6.8 per cent while the annual decline in industrial output worsened to 5.9 per cent – the steepest since the first recession of the Thatcher era in the early 1980s.

Stephen Radley, chief economist at the Engineering Employers' Federation, said: "These figures illustrate that the economy is a long way from being out of the woods and should quash talk of an early rise in interest rates."

Danny Gabay of J P Morgan said the weak set of manufacturing figures would give the Bank the "breathing space it was looking for" while John Butler of HSBC said the disappointing figures increased the likelihood that rates would not now begin to rise until the fourth quarter.

However, Ciaran Barr of Deutsche Bank said there was likely to be a tightening of monetary policy in the third quarter.

The 0.8 per cent fall in manufacturing output compared with expectations of a rise of 0.3 per cent for the month. The sharpest declines were in the chemical and transport sectors.

Economists said the fall in output from the transport sector appeared to be at odds with the surge in new car sales at the start of the year. However, National Statistics, the Government department that produced the figures, said the main reason for the weakness in output was that firms had de-stocked aggressively during the month.

"These data indicate just how fragile the recovery is," said Richard Iley, an economist at ABN Amro.

"Manufacturing is still facing considerable headwinds, not least from the strength of sterling and the lack of competitiveness."

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