Slowdown in factory orders fuels hopes of further rate cut

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The growth of Britain's manufacturing sector slowed sharply during December, official figures revealed yesterday, increasing the chances that the Bank of England's Monetary Policy Committee will again cut interest rates when it meets next week.

The Chartered Institute of Purchasing and Supply said that its purchasing managers' index had fallen to 52.9 in December from 54.3 a month earlier. An index score of above 50 indicates that the sector is still recording positive growth, but CIPS warned that new manufacturing orders fell to their lowest level since March 2006 last month.

Manufacturers said the global credit crisis had damaged clients' confidence, particularly amid growing concern that the crunch is likely to have a significant impact on the global economy during 2008.

Rob Dobson, an economist at NTC, which jointly compiles the CIPS index, said: "Client confidence is still being affected by tight credit market conditions and high cost inflation, leading many to postpone non-essential expenditures."

British manufacturers have until now been resilient to difficult trading conditions. December was the 29th consecutive month during which the sector reported positive growth.

Even so, the slowing rate of growth will alarm the MPC, which cut interest rates to 5.5 per cent last month and said it believed the threat to the economy posed by the credit crisis outweighed short-term inflationary concerns. To add to the case for a second rate cut, the CIPS survey also said that inflation in the manufacturing sector had slowed to a nine-month low last month, though price rises were continuing as companies struggled to cope with the increasing costs of materials such as fuel, paper, plastics and oil.

Economists expect manufacturers to continue to find trading more difficult during the course of this year. "We expect the manufacturing sector to lose further momentum as it is buffeted by the credit crunch, slowing domestic demand and elevated oil prices," said Howard Archer, chief UK and European economist at Global Insight.

"We strongly suspect that slowing growth in the eurozone and the US will weigh down on exports, although manufacturers are likely to benefit from a further weakening in the pound over the coming months, particularly against the euro."

This weakening continued yesterday, with sterling falling more than 1 per cent against the euro, as traders speculated that the manufacturing data made an interest rate cut more likely.

However, manufacturing now accounts for only a small part of the UK economy and figures from services companies, due on Friday, are likely to weigh more heavily on the MPC's deliberations.

Mr Archer added: "The Bank of England could cut interest rates by a further 25 basis points next week but we believe it is more likely to wait until February."