Manufacturing upturn diminishes prospects of rate cut

The prospects of a cut in interest rates virtually vanished today as the manufacturing sector showed more signs or revival while mortgage lending hit a new peak.

The Bank of England - which was already widely expected to hold interest rates steady on Thursday - reported that mortgage lending rose by a record ?8.35bn in July, the month it cut borrowing costs 3.5%, the lowest in 48 years.

Before today's data, a Reuters poll of 45 economists showed that they expected the Bank's monetary policy committee to leave rates unchanged. MPC members have been voicing concern recently at the high levels of personal debt amid fears that households will not be prepared when borrowing costs start rising.

It is a concern shared by the Liberal Democrats. Vince Cable MP, the Liberal Democrats' spokesman on trade and industry, said: "Many people appear to have an exaggerated sense of security that is not justified by economic indicators. Aggressive lenders must be reined in and the public need to be aware of the dangers of imprudent borrowing."

Meanwhile, a separate survey showed that the struggling manufacturing sector may have turned the corner. The purchasing managers' index (PMI) released by the Chartered Institute of Purchasing and Supply rose to 51.9 in August from an upwardly-revised 51.1 in July.

The reading exceeded City forecasts and was the sector's strongest reading since May 2002. A score under 50 indicates contraction while scores above that level signals expansion.

"This, and the services PMI, point to much stronger UK gross domestic product growth in the quarter than the slow pace seen in the first half of the year," Credit Suisse First Boston said in a briefing note.

The UK economy grew just 0.3% in the second quarter, following even weaker 0.1% growth in the first three months of the year.

Particularly encouraging in today's PMI survey was a bounce in exports, as well as a rise in manufacturing production and new orders.

The export index jumped to 53.5 from 49.8 in July - its strongest level since May 2002.

"Unlike other data on exports, which are painting an unclear picture, we are collecting hard data showing exports picking up strongly," said Chris Williamson, head of NTC Research, which compiles the report.

"August is showing a more balanced picture for the economy with export demand strong and new orders for investment goods rising very strongly."