Pressure to cut interest rates eases

Pressure on the Bank of England to cut the cost of borrowing next week eased yesterday as the latest survey of Britain's manufacturing sector showed it was in better shape than expected.

The latest snapshot of the UK industrial sector showed that although it was still in contraction, it was not shrinking as rapidly as City economists had forecast and analysts said this makes a rate cut in August, rather than July, more likely.

Earlier in the week analysts had said the Bank could start cutting the cost of borrowing next week on the back of a downward revision to GDP growth in the first quarter of the year and surveys showing house prices falling and consumer confidence softening.

Yesterday the Chartered Institute of Purchasing and Supply said the purchasing managers' index rose to 49.6 in June from a revised 47 in May. Analysts had forecast 48. A reading above 50 indicates expansion, below is contraction of the sector.

The Bank's monetary policy committee begins this month's two-day meeting next week. Last month it left interest rates unchanged at 4.75% although two of the nine-strong committee voted to cut rates.

Robert Barrie, economist at CSFB, said: "This improvement could well be enough to keep the MPC on hold next week - they are likely to decide to wait until the August inflation report meeting to lower rates."

But the data still showed the sector to be in a weak position and evidence of slowing growth in other sectors of the economy makes a cut in interest rates very likely, he added.

Although oil has risen to around $60 a barrel, manufacturers reported only a slight rise in input prices. "There remained reports of high electricity, oil, fuel and distribution costs, but these were much less widespread than in recent months," said the CIPS. Economists warned, however, that the effect of higher oil prices in June may simply be delayed until next month.

Analysts said the manufacturing sector is likely to experience two consecutive quarters of contraction. Paul Dales, of Capital Economics, said: "The manufacturing sector is still odds-on to fall into a technical recession in Q2."

In the eurozone, the manufacturing sector continued to contract but at a slower rate than the previous month. The index edged up to 49.9 last month from 48.7 in May.