Industry appeals to Bank as north-south divide grows

Engineering industry leaders yesterday urged the Bank of England to keep interest rates on hold for the forseeable future, warning that a further rise in borrowing costs would stifle a "fragile recovery" in manufacturing.

The warning came amid fresh evidence of a north-south divide, with southern engineering firms looking forward to increased output and northern companies experiencing further pressure on both prices and jobs.

The Engineering Employers' Federation accused the bank's monetary policy committee of refusing to listen to the manufacturing sector because of fears about a non-existent inflationary threat.

"There's a growing polarisation between manufacturing and services," said Martin Temple, the EEF's director general. "There's pressure for interest rates to rise and that will push the pound up, so we could face a double whammy. Manufacturing will suffer because of the successful service sector."

Mr Temple's comments came as the EEF said in its latest quarterly trends survey that engineering output had grown marginally for the first time in 15 months. High value segments such as aerospace, electronics and rail rolling-stock, often based in the south, are experiencing a genuine recovery while production of basic metals and machine tools, usually in the north, still face falling output.

The EEF predicted that overall growth would be 2.6% next year, with manufacturing and engineering output as a whole rising by 1.8%. It forecasts that the underlying rate of inflation will be 2.1% next year, or below the MPC's 2.5% target.

Warning that the Bank of England seemed to ignore the advice of its regional agents and to be fixated by the boom in south-east house prices, the EEF said a further rates increase would simply prolong the investment drought in engineering and manufacturing as a whole.

John Tissiman, managing director of Sheffield-based engineering firm Edward Pryor & Son, said sterling's strength was forcing firms in his area to shed labour. The EEF forecasts 60,000 further job-losses in manfacturing next year after a net loss of 160,000 in 1999.

But Mr Tissiman, president of the EEF's Sheffield association, said a further squeeze was being imposed by cheap imports from the Far East, India and Turkey.

Manufacturers of finished products like cars and trucks were now demanding price cuts of between 20 and 30% to match Turkish prices for basic metals.

"These are not companies that are dead beat and worn out.

"They are good and sound, but because it's a global market we have to make it a better economic environment for them to survive," Mr Temple said.

Admitting that it was unrealistic to expect any reduction in borrowing costs, he called for a long period of stability in interest rates. "We are not against holding inflation down, but on its own it's a very dangerous thing to run the economy on this one instrument."

The EEF said the tougher climate in the north was evident with the north-east, north-west, Yorkshire and Humberside and east midlands the only ones reporting further falls in orders.

These areas are also substantially cutting back on investment plans while several - excluding the north-east - are also shedding more labour than other regions.

A ray of hope for firms still crippled by an effective sterling exchange rate of three German marks is that the EEF expects the euro to strengthen next year as economic growth improves in mainland Europe.