Bank cut in interest rates unlikely

Source: Exec Digital UK

Date :07/11/2007 09:10:08

Pressure for a cut in interest rates has grown after figures revealed softer services activity and a sharp drop in manufacturing output.

Economists said the latest data increased the chances that the Bank of England's monetary policy committee (MPC) will sanction a pre-emptive cut in rates to 5.5% on Thursday.

The biggest surprise came from the services sector after the Chartered Institute of Purchasing & Supply (CIPS) said that last month represented the weakest rate of activity growth since May 2003.

The research also found a greater reluctance among clients to commit to new business spending, while worries over the financial markets crisis left business expectations at their weakest for more than a year.

Meanwhile, the Office for National Statistics said manufacturing output decreased by 0.6% between August and September. That was much greater than City expectations, leaving the sector's growth in the third quarter of 2007 unchanged on the previous three months. The manufacturing sector makes up 20% of the economy.

Despite weakening confidence and tighter credit conditions, the Bank of England had been expected to wait until next year before cutting interest rates.

Malcolm Barr, an economist at JP Morgan, said figures indicated a "rapid loss in momentum" and below-trend growth as early as the current quarter.

He added: "The recent mood music from the MPC suggests to us that this will not be enough to generate a cut from the MPC this week, but the decline puts a move back on the table as a realistic prospect."

Other negative signs from the economy came last week when figures revealed retail sales growth fell to its lowest level in almost a year. And the CIPS also reported slower growth in new manufacturing orders.

November 7 2007