Hopes diminish of a cut in interest rates this week

Dec 4 2007 By Peter McCusker, The Journal

A CUT in interest rates this week looks less likely after data showed factory gate prices continuing to rise.

The purchasing managers’ index of activity for November revealed prices, new orders and export orders all rose against October’s figures.

The City is looking for rates to be cut to ease concerns caused by the credit crunch, but the Bank of England remains worried about inflationary pressures.

Economists still view Thursday’s monthly decision by the Bank’s monetary policy committee (MPC) as a close call but said it was likely that interest rates will remain at 5.75% for another month.

Howard Archer, chief UK economist at Global Insight, said: “At this stage, we suspect that the MPC will delay cutting interest rates until early 2008.”

Yesterday’s study from the Chartered Institute of Purchasing & Supply (CIPS) posted an overall activity index of 54.4, up from October’s 10-month low of 52.8. Analysts had been looking for a figure of around 52.6 yesterday – a reading above 50 represents growth.

Paul Dales, of Capital Economics, said the survey was “probably a blip in the downward trend”.

He added: “Set against a slowing world economy and the strong pound, this seems far too optimistic to us.” CIPS said the latest rise in output was driven by robust growth of new work received, as domestic market conditions remained solid and the trend in new export orders posted a noticeable improvement.

Inflationary pressures remained elevated in the sector, with average factory gate prices continuing to rise at a near-survey record pace. The rate of purchase price inflation also accelerated to a four-month high, with companies reporting higher prices for oil, energy, chemicals and food products.

CIPS director Roy Ayliffe said: “Following last month’s loss of momentum in the manufacturing sector, this latest data suggests that the tide has turned. Purchasing managers reported growth in new orders, particularly from the export markets, despite inflationary pressures remaining elevated.”

Jobs were created in the UK manufacturing sector in November, continuing the trend observed so far throughout 2007.

However, the rate of increase in employment was the second-lowest during this year, as a number of firms reported that improved efficiency, redundancy programmes and cost-restructuring initiatives had led to job cuts.