Interest rate rise might be put off after fall in output

Manufacturers suffered their worst fall in output for almost a year in February, casting doubts over the likelihood that the Bank of England will raise interest rates on Thursday.

The shock drop was at odds with recent surveys that had suggested the seven-year slump in manufacturing was finally over.

Official figures yesterday showed the sector contracted by 0.6 per cent, confounding City forecasts of healthy expansion and wiping out most of its recent recovery. In a further twist, January's reported rise in output was revised to a flat reading.

The weak data contrasted with a bullish survey of the financial services sector, which suggested optimism among general insurers, fund managers and building societies had shot to a five-year high during the three months to March. The report by the Confederation of British Industry highlights the dilemma facing the Bank's monetary policy committee when it meets tomorrow, given the resurgent housing market.

The slump in manufacturing output prompted many economists, who had previously erred towards forecasting that the base rate would rise by 0.25 percentage points on Thursday, to bet instead on a May increase. Interest rate futures shot up and government bonds pared gains as dealers gambled against a rise this week.

David Page, at Investec Securities, said: "While most of the UK economy is recovering, manufacturing remains in the doldrums. This serves as a reminder as to why the MPC is likely to take its time before pushing through further rate hikes."

Meanwhile, a separate survey showed the dominant services sector grew more slowly than expected in March. The Chartered Institute of Purchasing and Supply report showed the index of activity in the services sector dipped to 58.7 from February's figure of 59.5. This relative resilience will go some way to countering the weak manufacturing data, economists said.

The Office for National Statistics said factory weakness across the board had contributed to February's output slump - the worst since last May. Of the seven major manufacturing sub-sectors, only one - coke and basic metal output - was up on January's figures. The worst culprit was the volatile electrical and optical sub-sector, which included a 7.4 per cent drop in computer manufacture.