House price and industry data ease Bank's rates dilemma

Michael Harrison
Wednesday 02 October 2002 00:00
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The interest rate dilemma facing the Bank of England eased slightly yesterday as fresh figures showed that while the housing boom continues unabated, manufacturing is also holding its own.

The latest data is likely to reduce the pressure on the Bank to sanction a cut from 4 per cent when its Monetary Policy Committee meets next week.

House prices rose 2.2 per cent last month, according to Nationwide Building Society, taking the increase for the year to 22.2 per cent, marginally down on the 22.7 per cent annual rise recorded in August.

At the same time, figures from the Chartered Institute for Purchasing and Supply showed that UK manufacturing expanded in September for the second month in succession, in contrast to sluggish figures from the US and a contraction in manufacturing in the eurozone. The September increase in house prices was still bigger than expected, however, and prompted Nationwide to increase its forecast for annual house price inflation in 2002 from 18 per cent to 23 per cent.

The CIPS manufacturing index was 50.2 in September, compared with 51 in August and market expectations of 50.7. Anything above 50 indicates expansion.

Adam Law of Barclays Capital said the dilemma for the Bank remained despite the CIPS survey. "Figures from the Nationwide show that the housing market remained extremely buoyant. Yet the CIPS survey reveals that conditions in [manufacturing] were weak in the month. Because of that, rates should stay on hold a while yet," he added.

Ciaran Barr, economist at Deutsche Bank, said: "Overall, [the] CIPS survey is not as bad as it could have been, but it is still lacklustre. The risks thus remain firmly to the downside for monetary policy going forward."

The UK manufacturing figures, coupled with slightly better than expected data from the US on industrial activity, helped steady financial markets after the dramatic sell-offs of the previous few days. The FTSE 100 index closed 2 per cent up at 3797.4 while the Dow Jones industrial average was 180 points higher in mid-afternoon trading.

They may also have heartened Gordon Brown, who indicated on Monday that the Treasury is preparing to cut its growth forecast for the UK. The Treasury's current forecast is for growth of between 2 and 2.5 per cent this year.

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