Sharp fall in manufacturing adds to pressure for rate cut

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The Independent Online
PRESSURE for a cut of at least half a percentage point in UK base rates mounted last night after the UK Purchasing Managers Index registered the sharpest fall in manufacturing activity since the survey began in 1992.

The overall index for October was down from 45.6 to 41.5 confirming the gloomy tone of last week's Industrial Trends Survey from the Confederation of British Industry.

It is the seventh successive monthly fall in the index. Output, orders, purchases and prices were all sharply down.

Economists said that the survey, which comes just days before the Bank of England's Monetary Policy Committee meets to determine interest rates, will provide further ammunition for members Willem Buiter and DeAnne Julius who called for a half-point cut in October and are expected to do so again.

Neither earnings growth nor money supply growth are seen by the committee as the cause for concern they once were, even though figures for M0, the narrow measure of money supply which includes notes and coins in circulation, grew by 5.4 per cent in September, down from August when M0 grew at a rate of 5.9 per cent.

Andrew Miligan, an economist at CGU, the insurance group, said: "The recent decline in the pound has not come to the rescue of UK manufacturers, having been more than offset by the global economic turmoil."

He added that yesterday's survey had shortened the odds on a half-point cut. Two more economic surveys are due this week, both of which could be even more crucial in tipping the balance.

If there is more bad news from the separate PMI survey of service industries on Wednesday, it will confirm that it is not just the manufacturing sector that is slipping into recession but the economy as a whole. The CBI Distributive Survey, which covers retailing, has been depressed for some time.

The gilts and equity markets are both factoring in a cut of 0.25 per cent this week, and analysts said both will see sharp selling if the MPC decides to hold rates where they are.

Gerard Lyons, an economist at DKB, the Japanese bank, believes that even 0.5 per cent will not be enough to stop Britain tipping into recession.

"They should go for a full 1 per cent cut and be prepared to cut again. In a low-inflation environment, real interest rates are sky high and need to come down a long way. However, the committee is likely to opt for gradualism and cut by a quarter point this time."