Output fall adds to rates dilemma

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INDUSTRIAL output fell in February but probably not enough to provide exporters with a knock-out blow in their pleas for the Bank of England to rule out any further rise in interest rates. The Bank's Monetary Policy Committee (MPC) meets tomorrow and Thursday for what could prove to be its most controversial decision since the Government gave it the power to set rates last May.

The influential half-year forecast from the OECD due later this week is expected to say there is no pressing need for higher interest rates. But separate figures yesterday cast some doubt on the argument that the economy is slowing fast enough already.

A new monthly indicator of GDP from the National Institute of Economic and Social Research (NIESR) suggested growth might have picked up in the first quarter of this year, while industry figures showed new car registrations in January to March soaring.

Gordon Brown, the Chancellor of the Exchequer, repeated his determination not to seek any short-term fix. He denied he was coming under pressure from Cabinet colleagues to do so.

The Chancellor said: "What some people are asking me to do to deal with the pound, or asking the Bank of England to do, is to take action that would actually make a recession more likely and bring us back to the stop- go and boom-bust policies of the past."

The pound edged lower yesterday, its index falling 0.1 to 107.8, down from the recent high of 108.9.

Total industrial output fell by 0.6 per cent in the three months to February, according to official figures. High temperatures in February reduced the value of electricity, gas and water supplied by 2.3 per cent during the month.

Manufacturing output, the main component of the total, barely shifted in February from a January level that had been revised up. In the latest three months, manufacturing production has fallen 0.5 per cent to a level only 0.3 per cent higher than the same period a year ago.

The output of engineering and food, drink and tobacco - two of the biggest sectors - were respectively 2.8 per cent and 2.0 per cent higher than a year earlier. But chemicals production was down 2.6 per cent and textiles down 5.1 per cent.

Yesterday's figures had some City experts warning of outright recession in industry. "Things are going to get worse for manufacturers before they get better," said Nick Vaughan at Barclays Capital.

But others said a rise in the cost of borrowing could not be ruled out. "The Chancellor was hoping to abolish boom and bust, but it looks as though we have both simultaneously," said David Mackie at JP Morgan, arguing buoyant services might have boosted first-quarter growth.

Certainly, the new monthly GDP indicator from the NIESR yesterday did not point to a marked slowdown. The index - incorporated in Bank economists' monthly presentation to the MPC last Friday - suggested the economy grew at a slightly slower quarterly rate of 0.5 per cent in March. But it also showed average first-quarter growth higher than in the fourth quarter of last year.