Pressure grows for big cut in interest rates

Poor manufacturing figures add weight to calls for MPC to take action
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The Independent Online

Dire figures from Britain's manufacturers today will put extra pressure on the Bank of England to make a big cut in interest rates this week.

British manufacturing is facing the toughest conditions for two decades as job losses accelerate, investment intentions collapse and domestic orders drop to their weakest level since 2001, the EEF industry organisation will warn today.

The EEF survey showed factory outputs plummeted in the last quarter and with orders, prices and margins all under growing pressure, the industry group is expecting redundancies of up to 90,000 next year.

The group is calling for the Bank to cut rates by a percentage point, after the Monetary Policy Committee's shock 1.5 point reduction last month. Every index tracked by the group's quarterly survey dropped through the floor in the three months since September.

Steve Radley, EEF chief economist, said: "We need to be pulling every lever we can, including fiscal stimulus, cutting interest rates and putting pressure on banks to improve lending to business."

The motor industry is the worst-affected sector, with a balance of minus 37 per cent reporting falling output. Representatives from across the in-dustry called a crisis meeting with Lord Mandelson last week to beg for support in the face of crippling credit constriction and falling consumer spending. The talks are to continue in the coming weeks but the Business Secretary was non-committal on what action, if any, might be taken. Unless the Government comes up with decisive measures in the very near future – including a state guarantee of credit insurance and lending – then the prognosis is dire, says the EEF.

"We are talking about days and weeks, rather than months," Mr Radley said. "Our redundancy forecast of 90,000 is not higher because a lot of manufacturers lost all their fat in the previous recessions. But if conditions deteriorate significantly, and action is not taken, we will see smaller companies going to the wall." The group is also pressing for the Bank of England to cut interest rates by another 1 percentage point next week.

Every index tracked by the group's quarterly survey dropped through the floor in the three months since September. After 21 months in the black, the output balance dropped to minus 11 per cent, and the order balance to minus 15 per cent. The domestic orders balance plunged to minus 26 per cent, the export balance from plus 18 to minus 10 per cent. Even the slight lift from sterling's fall against the Euro offers only the slightest pain relief in the context of collapsing exports.

Economists are divided over how big the MPC's cut will be on Thursday, with a slim majority in a Reuters poll expecting a half-point reduction and financial markets pricing in another one-point fall.

Mervyn King, the Bank's Governor, indicated last week that the Treasury's fiscal stimulus package announced in the pre-Budget report met with the Bank's approval. The MPC will look at a raft of other data released this week, including the November purchasing managers surveys for services and manufacturing.

Other figures released today will make grim reading. Hometrack's monthly housing survey shows property prices down 8.1 per cent over the last year with average values at January 2006 levels.

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