UK manufacturing hits a 20-year high

UK manufacturers recorded their strongest quarter for sales in almost two decades during the three months to the end of September, dampening hopes of an early cut in the Bank of England base rate.

According to the British Chambers of Commerce's (BCC) third-quarter survey, published yesterday, its net sales index rose to +36 per cent over the quarter, the highest since the index was launched back in 1989, and up 5 points since the second quarter. The number of manufacturers expecting to raise their prices also leapt from +24 to +32 per cent.

However, positive news in the manufacturing sector was offset by signs of a slowdown in the service sector, where both domestic sales and exports fell during the period.

The BCC, which represents local businesses, said it believed the overall picture was one of a weakening UK economy, and called on the Bank of England to cut rates next month. "The results of this survey show that the MPC [Monetary Policy Committee] must cut interest rates in November," said David Kern, an economic adviser to the BCC.

"An early cut in interest rates will reduce the need for larger and riskier cuts later on.

"Small businesses face growing threats in the year ahead. The Chancellor has this week reduced his growth forecast whilst using the pre-Budget report to hit entrepreneurs. By reducing rates next month the Monetary Policy Committee can help businesses through what are likely to turbulent times."

But earlier this week, Mervyn King, the Governor of the Bank of England, said that policy-makers were still watching out for an increase in prices, adding that output would need to slow if inflation was going to stay below the MPC's target of 2 per cent.

Analysts said the comments were an indication that the Bank was in no hurry to cut rates. "This survey does not appear to be nearly soft enough to give the Bank of England a significant prod towards cutting interest rates as early as November," said Howard Archer, the chief UK economist at Global Insight.

"In fact, we suspect that the BCC survey will reinforce the Bank of England's concerns that companies' pricing power and capacity constraints still pose a significant inflationary threat."

Mr Archer said he thought it was unlikely any rate cut would be made before next year.