Rate standstill as economy slows

Inflation wanes: Consumer credit rise fails to offset weak manufacturin g and house prices show a further dip
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Economics Correspondent

The Chancellor of the Exchequer and Governor of the Bank of England left base rates unchanged after their last monthly monetary meeting before the Budget. As they met yesterday, a batch of new figures confirmed that the economy was slowing and inflation pressures diminishing.

Manufacturing barely expanded last month, according to a survey of purchasing managers. The rise in prices manufacturers paid for materials was the lowest for nearly two years.

Outside manufacturing there was some evidence of greater buoyancy. There was a big increase in consumer credit in September, while faster import growth widened the August trade deficit.

Marian Bell, an economist at the Royal Bank of Scotland, said: "We have what the Americans would call a Goldilocks scenario.The pace of growth is neither too hot nor too cold."

Other City economists were more pessimistic. Simon Briscoe at Nikko Europe said: "The purchasing managers' survey definitely points to the continuing weakness of the economy." The figures strengthened the case for easing either interest rates or fiscal policy, he added.

Surveys showed manufacturing weakening on both sides of the Atlantic. In Britain's purchasing managers' survey, the overall index of activity was 50.5 last month. This was a shade above September's 50.4 but not far above 50, the watershed between recession and recovery.

The price index fell to 52.5 from 57.5 in September and a peak of 73.8 in June. Last month's figure indicated the smallest price rise for nearly two years.

The firms responding to the survey also reported the first drop in employment since September 1993. Stocks of finished goods fell for the third month running, mainly because of higher-than-expected sales in the consumer goods sector. Helen Macfarlane, an economist at brokers Hoare Govett, said: "It is encouraging manufacturers are growing their way out of the stock overhang rather than cutting output."

They have achieved this despite the tailing-off in exports this year. Separate figures yesterday showed Britain's trade deficit increased to pounds 1.3bn in August. The deterioration was due to the worsening trend in trade with non-EU countries, which partly reversed itself in September. The shortfall with the EU in August was almost unchanged at pounds 275m.

Other figures yesterday revealed an unexpected pounds 608m rise in consumer credit in September, compared with a pounds 518m increase the previous month. Credit grew 12.9 per cent in the 12 months to September, although the growth of total personal borrowing slowed to 5.5 per cent, held back by mortgage weakness.

The gilts market reacted favourably to the figures, aided by a rally in the US Treasury market.

The survey of US manufacturing by the National Association of Purchasing Managers was weaker than expected. The activity index fell to 46.8 from 48.3 in September and has been below 50 for three months.