Manufacturing strength fuels rate rise speculation

BRITISH manufacturing picked up steam in June, expanding at its fastest in six months and rounding off one of the best quarters for the sector over the past 20 years.

There is mounting City speculation that the Bank of England may raise interest rates. Picture: Getty

The performance fuelled mounting City speculation that the Bank of England may raise interest rates from historic lows of 0.5 per cent as early as this autumn as the recovery takes hold.

The Markit/CIPS manufacturing purchasing managers’ index jumped unexpectedly to 57.5 last month from 57 in May – its highest point since last November and well above the 50 line that divides growth from contraction.

The consensus forecast had been for the sector, which accounts for 12 per cent of GDP compared with 18 per cent in the late 1990s, to register a fall 
to 56.8.

Although output growth slowed slightly, new orders flowed in at the fastest rate since November and manufacturers took on staff at their quickest pace since March 2011.

Rob Dobson, senior economist at Markit/CIPS, said: “UK manufacturing continued to flourish in June, rounding off one of the best quarters for the sector over the past two decades.”

He expected official manufacturing output in the second quarter of 2014 to have expanded by more than the 1.5 per cent growth rate seen in the first quarter. “As a broader expansion is also a more sustainable expansion, the ongoing surging growth of output and new orders is exactly what is required,” Dobson added.

Bank of England governor Mark Carney sparked confusion last month when in his Mansion House speech he suggested that interest rates might rise faster than markets expected, only to apparently row back on the guidance at a subsequent meeting of the Treasury select committee last week.

One economist said yesterday: “This strong manufacturing data must add to the case for a rate rise relatively soon.

“Services has been strong continually since the last recession, and manufacturing has joined the party in recent months.”

However, David Kern, chief economist of the British Chambers of Commerce, pictured below, said hiking rates in the next few months would be wrong, even with the strong numbers from Britain’s factories.

“I celebrate the latest good manufacturing news, but I 
still think the call for interest rates to rise shortly is premature,” Kern said.

“Inflation is 1.5 per cent, well below the official target, and sterling has risen to levels that make our exports more expensive.

“The manufacturing sector has been behind services for some time, it fell well below where it was before the recession [of 2008-9].

“Just because there is a welcome improvement, jumping the gun now on rate rises would be groundless and unjustified.”

On the currency markets, the pound rose to its highest since the peak of the financial crisis, $1.714, against $1.710 the day before.