Recessionary signals boost rate hopes

DIANE COYLE

and PAUL WALLACE

Signs of recession in manufacturing and weaker inflationary pressures in both Britain and the US boosted financial markets on both sides of the Atlantic yesterday, thanks to hopes of lower interest rates.

The UK purchasing managers' index of manufacturing activity fell in February below 50 - the dividing line between expansion and contraction - for the first time since November 1992. Its US equivalent barely recovered from the previous month's weather-related decline and remained below the recession level of 50 for the seventh month in a row.

"The February Purchasing Managers' Index suggests that manufacturing industry is teetering on the brink of recession," said Adam Cole, UK economist at James Capel. He predicted base rates would fall from their current level of 6.25 per cent to as low as 5 per cent.

When the Chancellor, Kenneth Clarke, meets Eddie George, Governor of the Bank of England, on Thursday, he will be able to point to encouraging news on prices and the overall weakness in manufacturing. The survey's prices index fell from 49.1 to 44.4, its lowest level since January 1992.

A further sign of weakness was that the employment index remained below 50 for the second month running. There was also a sharp fall in new orders.

Forecasts that the Federal Reserve would reduce interest rates another notch helped push shares higher in New York yesterday. The Dow Jones surged 51 points to close at 5537.