Mixed signals on economy pose dilemma for rate setters

An unexpected downturn in manufacturing and acceleration for services firms and retailers has heightened the dilemma the Bank of England faces when its sets interest rates tomorrow.

Yesterday's mixed batch of data failed to give a clear steer ahead of what is the most hotly debated monetary policy decision this year. The slump in manufacturing triggered calls from employers and workers for a rate cut. The TUC said the case was "overwhelming" while the Engineering Employers' Federation said it would be "perfectly justified". But the National Institute for Social and Economic Research, the respected think-tank, said there was "no pressing need" for a rate cut.

It estimated the economy grew by 0.7 per cent in the three months to October, the same rate as September. "Manufacturing output remains weak but the service sector appears to be performing reasonably strongly," its director Martin Weale said. This image of an economy running at two speeds was confirmed by yesterday's figures. Manufacturing contracted 0.4 per cent in September, official figures showed, disappointing forecasts of a return to growth. However, the fall was driven entirely by a 12 per cent slump in production at Britain's car factories, which reversed August's 16 per cent fall.

The huge volatility in car output – due almost wholly to the timing of the jubilee holidays – made the data hard to interpret. Stripping out motor vehicles, manufacturing would have slumped 0.8 per cent in August and rebounded 0.2 per cent in September. "It lends itself to a variety of conflicting and perplexing interpretations," Philip Shaw, the chief economist at Investec, said.

By way of contrast, service sector growth accelerated in September against forecasts of a slight slowdown, according to the Chartered Institute of Purchasing and Supply's poll of some 600 managers. The robust survey was echoed by the Confederation of British Industry, which said retail sales bounced back strongly last month after stagnating over the summer. But it warned retailers were not confident it would continue.

But the Halifax bank was unable to say whether its house price survey for October would be published ahead of the MPC meeting.