Industry woe may hold rate rise to quarter-point

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Fears that homeowners will be hit by a half-point rise in interest rates for the first time in the six-year history of the Monetary Policy Committee faded yesterday after manufacturing appeared to be heading for recession.

The Bank of England is almost certain to raise rates today, but only by 0.25 per cent, after separate reports showed that house prices and services companies enjoyed another strong month in October. Economists believe a rise is inevitable and say a raft of upbeat numbers has moved the debate from "whether" to "how much". But the markets were surprised by news that factory output fell in September for the second month in a row.

"Today's data reduce the already small probability of a surprise 50 basis point rate move," Alan Castle, UK economist at Lehman Brothers, said. Although the MPC has cut rates by a half point it has never raised them by that margin. Only one of its members, the Dutch economist Willem Buiter, has ever voted for one.

The Office for National Statistics (ONS) said manufacturing output fell 0.2 per cent in September after dropping 0.5 per cent in August. Economists had expected a 0.4 per cent rise. There were sharp falls in the electronic, chemicals and basic metals sector, indicating the decline was widespread.

It meant the industrial side of the economy showed zero growth on the quarter rather than growth of 0.2 per cent the ONS assumed when it estimated GDP rose by a robust 0.6 per cent. That figure might now be revised. But the gloom in manufacturing was more than offset by separate figures that indicated the UK economy is running at two speeds.

House prices surged 1.2 per cent in October, the fourth month of a more-than-one per cent growth, the Halifax bank said. It also said that a quarter-point hike to 3.75 per cent would add just £4 a week, or £200 a year, for a borrower with a typical £80,000 mortgage. Martin Ellis, its chief economist, said: "We expect the increase in rates to have a minimal impact on the housing market."

John Wriglesworth, an independent housing analyst, said: "Those predicting that a rate increase will cause chaos in the housing market overlook that even at 4 per cent, the base rate will still be the lowest since January 1955," he said.

Business groups continued a rearguard action to avert a rate increase. David Kern, the chief economic adviser to the British Chambers of Commerce, said: "The clamour for early rate increases is clearly unjustified. The deep-seated forces that have caused prolonged manufacturing weakness in the past few years still pose a threat."

Digby Jones, the head of the CBI, said: "If the Bank chooses to raise interest rates today, the move must represent the reversal of July's precautionary cut, and not break the dam on interest rates by signifying a series of quick rises."

Analysts said yesterday that manufacturing data had been overtaken by this week's report from the Chartered Institute for Purchasing and Supply (Cips) that showed it rebounded in October. But separate Cips figures yesterday showed that services companies, which make up two-thirds of the economy, grew at their fastest pace for four years last month.