Factory slowdown rules out imminent rate rise

Manufacturing boom fading after earlier, near-record growth

Sean Farrell
Wednesday 04 May 2011 00:00

Disappointing manufacturing output figures for April have virtually ruled out any chance of Bank of England policymakers raising interest rates at their meeting starting today. The Markit/Cips index of factory output fell well below the most pessimistic analyst's forecast for last month.

A sharp fall in the growth of new orders reinforced the picture of a manufacturing boom fading after near-record growth at the turn of the year.

Manufacturers' growth came from exports while weak consumer confidence and lower orders from the construction sector reduced domestic demand.

The surprisingly slow performance in what was the strongest part of the economy hit hopes that the recovery might be strengthening after anaemic growth figures in the first quarter.

Manufacturing's slowdown followed other weak economic data and virtually ruled out a rise by the Bank's Monetary Policy Committee (MPC) when its monthly meeting ends tomorrow.

Markets had priced in a quarter-point increase in borrowing costs this month from their record 0.5 per cent low, but weak first-quarter GDP figures and consumer confidence data had already dampened expectations.

Vicky Redwood, an economist at Capital Economics, said: "The manufacturing recovery is coming off the boil a bit and that was the one part of the economy that was growing. At the margin this gives another reason for the MPC to hold fire on interest rates. We don't think rates will rise until 2013."

Sterling tumbled and gilt futures hit a contract high as markets reined in expectations for higher rates following the manufacturing figures.

The Markit/Cips manufacturing PMI headline index reading of 54.6 was below the 56.9 consensus forecast in a Reuters poll. Figures above 50 show expansion.

Interest rate futures show a 50 per cent chance of the first rate rise coming in September, with a full quarter-point increase not priced in until the end of the year.

Manufacturing has been the healthiest sector of the economy since Britain emerged from recession late in 2009. The PMI survey's headline activity rate has stayed above the 50.0 mark, which indicates growth, for 21 months.

The sector, which accounts for about 13 per cent of the economy, grew 1.1 per cent in the first quarter, helped by a weaker pound and strong export demand.

The Bank's Governor, Mervyn King, said on Monday that high levels of debt pose "massive" challenges for European economies that would be made worse by higher interest rates.

Mr King has voted against increasing rates on the MPC, which is split on whether to increase borrowing costs to target above-target inflation.

Average purchase prices for factory raw materials rose for the 20th straight month, but the rate of inflation eased to a five-month low.

Rob Dobson, the senior economist at Markit, said: "This [easing of input costs] adds weight to the Bank of England's view that inflationary pressures are transitory and suggests that policy-makers will continue to hold fire on the interest rate trigger."

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