Falling pound fuels hope of steady rate

Industry has yet to feel the benefit of the pound's recent slump on the foreign exchanges, new data showed yesterday, adding to hopes that the Bank of England will keep interest rates on hold next week.

Manufacturing output grew fractionally last month, according to the latest snapshot of the sector from the Chartered Institute of Purchasing and Supply.

"There's little sign of growth in UK manufacturing and the strong pound is still taking its toll on domestic and export orders," said Roy Ayliffe, director of professional practice at the institute.

"The effect of the weakening of the pound has not really fed in yet and manufacturing is looking for more of that in order to sustain any competitiveness abroad, especially against the euro."

The purchasing managers index stood at 50.7 in May, fractionally up from the 50.6 recorded the previous month. Readings above 50 indicate that the sector is growing.

Companies are still shedding workers, according to the institute but at a slower rate than in April.

The employment index stood at 47.6 in May, compared with 46.2 recorded the previous month.

Prices for fuels and raw materials are still rising, but at a slower rate than in April. "With export orders lagging movements in sterling, exporters seem set for many more months of gloom," said Dharshini David, UK economist at HSBC.

"This survey is one more reason to think that rates will remain unchanged next week."

The Bank's decision is finely balanced. The strength of the pound has kept inflationary pressures under control for several months and enabled the Bank's monetary policy committee to hold rates at 6% since February.

However, since the committee's last meeting, the pound has lost more than 5% of its value against the currencies of Britain's major trading partners.

"The MPC must be comforted by signs that the economy is slowing and will welcome the recent fall in the pound. The risk is that the economy may not slow as quickly as expected and that the pound may fall faster than expected," said Adam Chester, an economist at Halifax.