Recessionary signals boost rate cut hopes

DIANE COYLE

and PAUL WALLACE

Signs of recession in manufacturing and weaker inflationary pressures in both Britain and the US boosted financial markets on both sides of the Atlantic yesterday, thanks to hopes of lower interest rates.

The UK purchasing managers' index of manufacturing activity fell in February below 50 - the dividing line between expansion and contraction - for the first time since November 1992. Its US equivalent barely recovered from the previous month's weather-related decline and remained below the recession level of 50 for the seventh month in a row.

"The February Purchasing Managers' Index suggests that manufacturing industry is teetering on the brink of recession," said Adam Cole, UK economist at James Capel. He predicted base rates would fall from their current level of 6.25 per cent to as low as 5 per cent.

Official figures have already shown that manufacturing output fell by 0.2 per cent in the final quarter of 1995.

When the Chancellor, Kenneth Clarke, meets Eddie George, Governor of the Bank of England, on Thursday, he will be able to point to encouraging news on prices and the overall weakness in manufacturing. The survey's prices index fell from 49.1 to 44.4, its lowest level since January 1992.

A further sign of weakness was that the employment index remained below 50 for the second month running. Purchasing managers said the number of firms announcing redundancies again outnumbered those recruiting.

There was also a sharp fall in new orders, which fell back from 53.0 to 50.2 in February.

In the US, the National Association of Purchasing Managers' index of activity rose to 45.2 from a weak 44.9 in January. The index has now been pointing to a contraction in manufacturing for seven months running.

The price component fell to 38.3 from 39.4, its lowest since November 1991. Signs of inflation in manufacturing have been receding for over a year.

''Figures as drab as this mean the Federal Reserve will not want to do anything other than ease rates,'' said Ian Harwood, international economist at Kleinwort Benson. He predicted a move after the Fed's next policy meeting on 26 March.