Resist interest rate rise pressure, CBI urges Bank

The CBI last night urged the Bank of England to resist pressure for an early rise in interest rates when it warned that a premature tightening of monetary policy risked choking off a fledgling recovery in the manufacturing sector.

In its quarterly industrial trends survey, the employers' organisation reported an increasingly upbeat mood as firms became more optimistic about their prospects than during the international tension of the spring.

It emphasised, however, that the improvement in business sentiment had yet to feed through into stronger order books or to affect weak profit margins, adding that firms were still planning to cut jobs and investment over the coming months.

Ian McCafferty, the CBI's chief economic adviser, said: "Evidence that optimism among manufacturers is less negative than in the spring suggests that the mood is lightening slightly, but previous expectations of improvement have been dashed several times over the past 18 months.

"CBI member firms are unsure about the health of the international economy, suggesting the UK recovery will remain fragile for some time. Overall, this is an encouraging survey, but it is too early to say whether firms have really begun to turn the corner."

Some City economists be lieve the Bank's monetary policy committee may be tempted to reverse July's quarter-point reduction in interest rates to a 48-year low of 3.5% when it meets at the start of next month. Mr McCafferty said this would be a mistake.

"Our worry is that the first rise [in interest rates] is the one that has the biggest potential for doing psychological damage to consumers and industry, so we would not want it to be premature."

The CBI's survey of 836 firms showed 18% were more optimistic than three months ago, while 25% were less optimistic. Although more firms were pessimistic than optimistic, the CBI said the gap of seven percentage points was the smallest since July 2002.

In addition, the steady decline in orders witnessed during 2003 is expected to come to an end over the next quarter. But with 68% of firms working below full capacity and 91% reporting that capacity is adequate to meet demand, the CBI predicted that 36,000 jobs would be shed in industry over the coming three months, following a decline of 31,000 in the past three months.

Investment intentions remained weak, but the CBI said plans for spending on new plant and machinery were the least negative for more than a year, with firms increasing training budgets.