CBI warns Bank over interest rates

The Bank of England must avoid a premature rise in interest rates, the Confederation of British Industry said as it reported a sharp fall in manufacturing orders today.

In its quarterly industrial trends survey, the CBI said 36% of firms had seen a drop in new orders in the three months to April, with 19% reporting a rise. The balance of minus 18% was the weakest figure for 20 months, it said.

Meanwhile, costs and prices rose at their fastest rates since July 1995, with costs clearly outstripping prices, the CBI said. Falling orders and output and rising costs and prices led to the third successive deterioration in confidence.

"This latest setback for manufacturing can be attributed to a number of factors," Ian McCafferty, the CBI's chief economic adviser, said. "Probably the most significant is the hike in oil prices, which has helped to push up costs at the fastest rate for nearly 10 years, while also constraining demand for manufactured goods in key overseas markets such as the EU."

In other signs of trouble for manufacturers, the CBI said export orders had declined at the fastest rate for 18 months, and that companies had reported a first fall in output for six quarters.

Manufacturers said they planned to cut investment in buildings as well as machinery, reflecting deteriorating confidence and uncertainty about future demand.

The CBI offered a bleak outlook for manufacturing jobs, predicting that 22,000 posts were set to be axed in the three months to June. The forecast followed the cutting of 21,000 in the first quarter of the year.

However, job losses were expected to be higher than the CBI figure, because its survey was taken before the impact of MG Rover's collapse.

The Conservatives and the Liberal Democrats have criticised the government for its record on manufacturing. The sector has lost around 1m jobs since Labour came to power in 1997.

Earlier this month, the Bank of England left interest rates unchanged at 4.75% for the eighth successive month. Analysts are divided over whether the Bank would raise rates next month because of recent mixed economic data.

While inflation rose to an unexpected 1.9% annual rate in March and first quarter economic growth was a solid 2.8%, most of the Bank's nine monetary policy committee members remained concerned about the softness in consumer spending.

Sir Digby Jones, the director-general of the CBI, said it would fiercely resist any higher taxes on business after the election because of the fragile state of manufacturing. He also warned against a rise in borrowing costs.

"The Bank of England must continue to ensure that inflationary pressures remain under control, but they must also avoid a premature rise in interest rates," he said.