Slide in factory prices points to new year rate cut

Manufacturers cut their prices last month despite an increase in raw materials costs, according to figures yesterday that fuelled hopes of a new year cut in interest rates.

Prices of goods leaving UK factories fell 0.1 per cent in October, taking the annual rate to a four-month low of 2.6 per cent. Stripping out volatile components such as petrol prices, the core rate - which central banks watch for signs of inflationary pressure - fell 0.3 per cent on the month, the steepest drop for more than six years. "The Bank of England should be pleased with this data," Howard Archer, at Global Insight, said. "They keep the door open for a rate cut early in 2006 if the economy fails to show sustained significant signs of improvement."

The price cuts were imposed despite a 0.3 per cent rise in the raw materials bill, which was higher than expected. The annual rate slowed to 7.7 per cent from September's 10.2 per cent. Analysts said the figures indicated the worst impact of the rise in commodity prices had passed without a surge in inflation that many observers - including the Bank's Governor, Mervin King - had feared.

Jonathan Loynes, at Capital Economics, said the build-up of cost pressures in industry over the past two years was coming to an end. "The figures brought encouraging evidence that pipeline inflation pressures in the UK are easing," he said. "The very competitive conditions evident in the high street are forcing producers, just like retailers, to keep a tight lid on prices."

The British Chambers of Commerce said it expected a quarter-point rate cut early in 2006, although it acknowledged the size of the public deficit would prevent the Bank from cutting rates too far. It cuts its forecast for growth this year to 1.6 per cent, down from 2 per cent in August and half the 3.2 per cent achieved in 2004. The Treasury forecasts growth of 3 to 3.5 per cent.

"The slowdown is mainly being driven by sharply lower growth in household consumption, as the cooling housing market and the higher personal debt burden dampen spending," David Kern, its chief economic adviser, said. "There is a distinct risk of manufacturing recession."

The London Retail Consortium said sales fell at stores in the heart of the capital for a fourth month in a row in October as consumers continued to avoid the city after July's terrorist bombings. Like-for-like sales dropped 2.3 per cent, repeating September's fall.

In contrast, there was upbeat news from the housing market. The August rate cut triggered the sharpest increase in new buyers registering at estate agents for almost two years, the Royal Institution of Chartered Surveyors (Rics) said.But Jeremy Leaf, a spokesman for Rics, warned: "A return to boom conditions is not at all evident."