Rate cut calls grow after industry slashes prices

Industry was piling the pressure on the Bank of England last night for a cut in interest rates after the CBI reported that Britain's recession-hit manufacturers were slashing prices in response to weak order books and falling output.

The monthly snapshot of industry from the employers' organisation gave no hint of a so-called "Baghdad bounce" for the economy following the end of the war in Iraq. Instead, it suggested the economy continued to struggle after the fighting stopped in April.

The CBI called on the Bank to drop its cautious approach to rate cuts and reduce borrowing costs from their current level of 3.75%. This week, the Bank revealed that its monetary policy committee had voted 6-3 against a quarter-point cut this month. The CBI - backed by many City analysts - believes that the Bank will be forced into a more aggressive approach by the recent run of data.

Some economists noted that business surveys in the US - where rates are 1.25% and where a further reduction from the Federal Reserve is anticipated next week - have been more optimistic than those in the UK.

Other figures out yesterday showed a fall in retail sales of 0.1% in May - the first drop since January. With recent UK data showing unemployment rising and inflationary pressures ebbing, the City said yesterday's news increased the chances of the MPC moving. "The domestic data continues to suggest that interest rates have further to fall," said Graham Turner of GFC Economics.

The CBI said yesterday that it saw no sign of a manufacturing recovery, with order books weak at home and abroad, more firms planning to cut production than to increase it, and fewer than one in 10 firms confident enough to contemplate raising prices over the coming months. Its monthly industrial trends survey found that total order books remained "significantly below normal", with only 12% of the 962 manufacturers polled saying they were better than usual and 39% saying they were worse. For exporters, suffering from economic stagnation in their main European markets, the position was even gloomier. Only 10% of companies said export order books were above normal, while 45% said they were below. The figures give no hint that UK manufacturing is benefiting from the fall in the pound, which should make exports cheaper in overseas markets.

A quarter of companies are planning to scale back production in the coming months, against 19% who plan to expand it. This is despite widespread price cuts, with 24% of companies planning to reduce their tariffs in the next four months and a further 67% keeping them on hold. Only 9% said they would be going up. "Manufacturers' long wait for recovery seems set to continue and firms will take little comfort from the current business climate", said Doug Godden, the CBI's head of economic analysis. "An interest rate cut remains appropriate."