Factory gloom raises rate cut fears

The failure of Britain's battered manufacturing sector to recover from June's record plunge raised fears yesterday that the economy will require new cuts in interest rates to insulate it from the downturn in the global economy.

Manufacturing output increased by 4.9% in July, according to the office for national statistics - the strongest rise since February 1979, but not large enough to reverse June's dramatic 5.5% decline when factories shut down for the jubilee holiday.

With a downbeat jobs report from the US and weak industrial order figures in Germany also released yesterday, analysts said that the Bank of England's monetary policy committee could be forced to resume last year's bout of rate cutting.

Economist Simon Rubinsohn, of Gerrard, said: "If these trends persist, a rate cut could be sanctioned as early as the October meeting of the MPC."

Overall industrial output, which includes energy extraction and supply as well as manufacturing, rose by just 3.4% in July, according to the ONS.

Leading economic think-tank, the National Institute for Economic and Social Research, said that with little sign of a strong recovery in output, it believed the economy must have slipped into reverse last month.

Issuing its monthly estimates for economic growth, Niesr pencilled in zero growth for the three months to July, and a contraction of 0.1% for the three months to August - though it cautioned that uncertainty about the effects of the Jubilee holiday meant the MPC was right to leave borrowing costs unchanged on Thursday.

In the US, the government said non-farm payrolls rose by 39,000 in August - enough to reassure Wall Street, but not a sharp enough increase to signal a strong economic recovery, according to analysts.