Manufacturing output slides as equity withdrawal slows

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The Independent Online

An unexpected tumble in manufacturing output and remortgaging activity yesterday took the steam out of speculation that the Bank of England will raise rates tomorrow.

The financial markets reacted sharply to the first negative pieces of news on the UK economy for several weeks to scrap their bets on an imminent rate cut.

The Bank said the volume of mortgage equity withdrawal (MEW) over the summer - lending not used to buy a home - suffered its first fall for three years.

Homeowners borrowed £11.29bn against the rising values of their properties in the three months to June, down from £11.48bn in the previous three months.

However, the Bank cut the first-quarter figure by £2bn from a first estimate of £13.46bn in a clear sign the boom in MEW has finally ground to a halt.

While homeowners cashed in an immense £22.76bn in the first six months of the year this was a modest 3 per cent increase on the second half of 2002. It compares with an astonishing 40 per cent increase between the first and second halves of last year.

Analysts said the slowdown would be greeted with relief at the Bank, which has grown increasingly worried about the scale of borrowing and the role it was playing in fuelling a high street spending boom.

They said the fall was a response to a slowdown in house price inflation combined with the withdrawal of many of the historically low fixed-rate mortgage deals.

Simon Rubinsohn, chief economist at City fund manager Gerrard, said: "The downturn in MEW suggests that concerns over stretched consumer balance sheets may begin to ease.

"The likelihood of a tightening in policy at this week's Monetary Policy Committee meeting has all but disappeared."

This was reinforced by official figures in manufacturing in August, which showed that output slumped by 0.6 per cent, the worst performance since last October.

The Office for National Statistics said the fall was entirely driven by a drop in output of transport equipment and machinery equipment.

The Engineering Employers' Federation said the figures highlighted the "mixed messages" emerging from the economy.

"Until the Bank has firmer evidence of recovery, especially in manufacturing, it should hold off from raising interest rates," said Steve Radley, its chief economist.

Meanwhile, the National Institute of Economic and Social Research said the economy grew 0.6 per cent in the third quarter of the year, the same as in the second quarter, making a rate rise likely.

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