Hopes of interest-rate cut dashed by upbeat manufacturing survey

Britain's manufacturing sector yesterday gave an upbeat account of its prospects for 2008, reducing the chances of an interest-rate reduction when the Bank of England's Monetary Policy Committee meets for its monthly meeting later this week.

While gloom stalks the high street and the financial sector, manufacturers continue to buck the trend. The latest survey from the Chartered Institute of Purchasing and Supply indicates that confidence in the sector has bounced back.

The CIPS purchasing managers' index rebounded to 54.4 in November from 52.8 in October, well above City forecasts, following a sharp jump in export orders.

Manufacturers also warned of higher price pressures, with input costs up as a result of higher food and oil prices. These are being passed on in manufacturers' selling prices.

The CIPS figures are in line with recent data from the Society of Motor Manufacturers on robust UK vehicle production, the quarterly EEF survey of manufacturing output, and the CBI industry survey.

All the surveys suggest a healthy manufacturing sector, comparatively unaffected by the turmoil in financial markets. The credit crunch does not seem to have markedly affected this sector of the economy's ability to produce or invest.

Years of decline have seen manufacturing slump to around a fifth of the UK economy, but it remains important for the UK's trade balance, which is running at record deficits. Export success is centred on mainland Europe, the Far East and the Middle East. Despite the strength of the pound against the dollar, on a trade-weighted basis taking account of the strong euro the pound has recently exhibited a slight weakness.

The latest data from manufacturers is likely to deter at least some MPC members from voting for the quarter percentage-point cut in rates that retailers, mortgage lenders and other groups have campaigned for. That could be crucial because analysts regard this week's vote as being an especially close call.

"The continued resilience of the manufacturing sector combined with worries about pipeline inflationary pressures will likely contribute to a no-change decision this week," said Amit Kara, economist at UBS, though he said other data could yet swing the vote in favour of a cut. "More important for the economy and the MPC in our view is the services sector data that is due to be released on Wednesday."