Dove flies in as rate is cut

Business leaders welcomed the appointment of another inflation dove to the Bank of England's rate-setting committee yesterday as Threadneedle Street cut borrowing costs for the second time in three months.

The Bank said it eased rates by 0.25 percentage points to 5.5%, their lowest since January last year, because of the risks to growth from foot and mouth disease and the global slowdown.

Official figures yesterday showed that the manufacturing sector is already teetering on the brink of recession because of the collapse in world demand for hi-tech goods.

Kate Barker, chief economist at the Confederation of British Industry, is to join the Bank's nine-member monetary policy committee, taking the place of DeAnne Julius, the MPC's leading inflation dove, the Treasury announced.

The chancellor, Gordon Brown, said he was delighted that Ms Barker had agreed to be one of the four "external" members of the MPC appointed by the government. "Kate is a first class economist and I am delighted that her talents have been recognised in this way," said the CBI director general, Digby Jones. "She has many years experience in business which I am sure she will use to great effect."

City analysts said the arrival of Ms Barker confirmed hopes that borrowing rates could be as low as 5% by the end of the year.

"While people's views can change, we would suspect she will be very sympathetic to the conditions in industry and not just manufacturing," said Ciaran Barr, chief UK economist at Deutsche Bank.

News of Ms Barker's appointment came as the office for national statistics announced that industrial output shrank by 0.3% in February. The main reason was a steep decline in energy extraction and supply - which the ONS blamed on poor weather in the North Sea - but manufacturing failed to rebound after January's steep fall, rising just 0.1% over the month.

Analysts said the hi-tech manufacturing boom appears to be over. Demand for mobile phones, internet connections and digital set-top boxes kept the manufacturing sector afloat for much of the last year, while old economy sectors such as textiles and metals were declining.

So-called new economy firms have begun cutting output in response to the global fall in demand for hi-tech goods. Over the last three months demand for network components and mobile phones has fallen by almost 9%.

Industry is already in recession on the wider measure, which includes the energy sector, and many analysts expect manufacturing to follow.

"Given the general downbeat survey evidence of late, it seems more likely that output will weaken further," said Daniel Kaye, UK economist at Capital Economics. "Technical recession in manufacturing over the first half of the year now looks likely."

The ONS said it had cut its estimate of the trend rate of growth in manufacturing from 1.5 to 0.5% this year. Statisticians said industrial production in February was largely unaffected by the onset of foot and mouth, although they expected the impact to be more serious when the March data is published.

The epidemic has already caused food prices to increase, according to the British Retail Consortium. Prices rose by 0.7% in March, the highest month on month rise for nearly two years.

Related special reports
Foot and mouth disease
Budget 2001
Globalisation

Related articles
29.03.2001: MPs demand quick rate cut
29.03.2001: Analysis by Larry Elliott

Useful links
Bank of England
Chartered Institute of Purchasing and Supply
Global exchange: campaign to change global economy
UK interest rates since 1985