Drop in industrial output seen to bolster MPC doves

News of an unexpected decline in the output of British industry last month could lead some members of the Monetary Policy Committee to call for a cut in interest rates this week, according to analysts.

News of an unexpected decline in the output of British industry last month could lead some members of the Monetary Policy Committee to call for a cut in interest rates this week, according to analysts.

The MPC is still expected to leave rates unchanged for the ninth month running after its meeting ends on Thursday, the day after Gordon Brown's Pre-Budget Report.

However, official figures, published yesterday, showing a 1.1 per cent drop in industrial output in September, the biggest drop since August 1997, encouraged industry groups hoping for a reduction in the cost of borrowing.

David Walton, an economist at Goldman Sachs, said: "It would not be surprising if the doves felt a cut in interest rates was appropriate."

The fuel blockades in September had "no discernible impact" on the figures, according to National Statistics. As the output decline in September followed a stronger-than-expected increase in August, the statisticians left their estimate of trend growth in manufacturing unchanged at 1.5 per cent.

But the actual growth rate declined to 0.6 per cent, the weakest for more than a year. Warm temperatures during the month cut oil and gas production and electricity and gas supply, explaining much of the decline. But manufacturing output, which makes up the bulk of total industrial production, also fell, dipping 0.4 per cent during the month.

The disappointing figures came as the Treasury published a report documenting the UK's productivity shortfall compared with other leading economies. The paper said the trend was showing signs of improvement and picked out tougher competition policy as being particularly important. "We can have a strong economy in Britain but we don't have one yet," a Treasury official said.

Officials said the public finances would continue to be based on the cautious assumption that trend growth was still only 2.25 per cent until the National Audit Office had approved a higher figure.

Separately, estimates from the National Institute of Economic and Social Research, out yesterday, suggested GDP growth slowed in October, dipping to a 0.6 per cent quarterly rate from 0.7 per cent in September and a recent peak of 1 per cent during the summer.

The September decline in industrial output was largely a blip, National Statistics said. The underlying growth rates in some sectors were robust but components, which had been very strong in August, had subsequently fallen back.

For example, output of electrical and optical equipment rose 4.1 per cent in August and fell 1.0 per cent in September. Taking the latest three months, this sector had expanded by 6.5 per cent.