Further rate rises in balance as factories stall again

The Bank of England was handed an unexpected dilemma yesterday as factories suffered their worst fall in output for two years but house prices bounced back sharply.

The Bank of England was handed an unexpected dilemma yesterday as factories suffered their worst fall in output for two years but house prices bounced back sharply.

Manufacturing industry was left on the brink of recession after output tumbled by 0.8 per cent in August, its third successive monthly fall, according to official figures. But house prices surged 1.4 per cent last month, said Halifax, the country's biggest mortgage lender - contradicting talk of a slowdown in the housing market.

The Bank's monetary policy committee is now certain to leave interest rates on hold today, although the mixed figures left the City split over its next move. "In the absence of strong evidence one way or the other, policy is now at a particularly delicate stage," Andrew Smith, the chief economist at KPMG, said. "The MPC will wish to avoid overkill as the aim is a 'soft landing' for the housing market and consumer spending - but equally it will not wish to see house prices rebounding and growth remaining above trend."

The fall in manufacturing surprised the City, where analysts had pencilled in a 0.3 per cent rise. The 0.8 per cent drop followed falls of 0.5 and 0.6 per cent in July and June - the first consecutive three months of falls since the aftermath of the 2001 terrorist attack on the US.

Paul Dales, UK economist at Capital Economics, said the figures were "dreadful". "The MPC's strategy of raising rates to take the steam out of the housing market is in danger of leaving the economy with much less forward momentum," he said. Separate figures yesterday showed new car registrations fell 2 per cent in September.

The outlook was muddied by the Halifax survey, which showed the strongest rise in house prices for four months in September, following a 0.5 per cent fall in August.