Growth in orders boosts UK manufacturing

Britain's manufacturing recovery picked up steam last month, a survey showed today, raising expectations of an increase in interest rates before the end of the year.

The purchasing managers' index (PMI) from the Chartered Institute of Purchasing and Supply and Royal Bank of Scotland jumped to 55.1 in June from 53.5 in May - its highest level since July 2004 and well above City expectations. A reading above 50 signifies expansion.

"The manufacturing sector, which for some time appeared to have missed out on the global industrial recovery, now seems well and truly at the party," said John Butler of HSBC.

Sterling rose amid speculation that the Bank of England would increase borrowing costs, although its monetary policy committee is expected to keep interest rates at 4.5% on Thursday.

"While the survey is unlikely to have a major impact on the Bank of England's thinking, it modestly bolsters the case for an interest rate hike before the end of the year," said Howard Archer of Global Insight.

According the index, the growth in new orders - 57.7 last month, up from 55.8 in May - reached a near three-year high and, in a rare occurrence, employment in the sector increased.

Domestic demand appeared to have driven June's increase in orders, with consumer goods industries experiencing the fastest growth.

Companies reported benefits from stronger economic conditions in the eurozone, which prompted an increase in orders from Germany, France, Italy and Spain, according to the survey.

Manufacturing production increased at its fastest rate for almost two years in June, with the output index rising to 58.8 - its highest since July 2004 - from 56.4 in May.

The growth in export orders eased slightly to 53.1 from 54.5 but firms were still clearly benefiting from the upturn in the eurozone. The eurozone PMI, published earlier today, showed manufacturing activity in June expanded at its fastest pace for six years.

On a less positive note for inflation watchers, the survey noted that the costs of energy and raw materials continued to climb, with the input prices index up from 67.1 to 67.5, the sharpest increase for 17 months.

Prices at the factory gate also rose as companies tried to cover their costs, pushing the output prices index up to 54.6, a three-month high.