---- by Victoria Main ----
LONDON (AFX) - Prospects of a further cut in UK interest rates before the end of the year have risen with yesterday's news of a slump in manufacturing output in July, according to economists. They said yesterday's decision by the Bank of England's monetary policy committee to keep the repo rate at 5.0 pct, despite the sharpest decline in manufacturing production in a decade, was widely expected, given the ongoing strength in consumer spending in the UK. However, economists said the weak manufacturing features mean another rate is on the cards in the coming months, perhaps in November at the time of the publication of the BoE's quarterly inflation report.
"The confirmation of the weakness in the manufacturing sector is the main factor that could prompt the Bank of England to lower its repo rate further in the next months," BNP Paribas Marion Girard-Vasseur said.
"The joint effects of the recent moderation in inflationary pressures and lacklustre prospects for the manufacturing sector in the short term could prompt the Bank of England to implement an ultimate rate cut in the months ahead, maybe in November," she said. Girard-Vasseur said that apart from yesterday's manufacturing figures, no news in the past month justified further monetary easing this month.
Standard Chartered economist Julian Jessop agreed the MPC's decision yesterday was widely anticipated, but said the markets are unusually confused about the outlook for the coming months. "Our view remains that the Bank of England will cut rates again this year and retain a bias towards easing in 2002," he said. Jessop added, "This view has simply been reinforced by the shockingly bad news from the manufacturing sector." He said that while the main obstacle to a rate cut yesterday was presumably the relative strength of the domestic economy, there are signs that the protracted recession in manufacturing is having a wider impact.
He cited the Gfk survey of consumer confidence, the BoE's preferred measure, which is showing a decline, and the services purchasing managers index for August showing a fall in the new business component.
He said the balance of risks is clearly that further deterioration in manufacturing could weigh on consumer confidence and on spending. "This might take a couple of months yet to trigger a further rate cut - our best guess is November, alongside the publication of the next quarterly inflation report - but rates will end this year lower," he said.
Investec chief economist Philip Shaw too saw the manufacturing figures as increasing the chances of a November rate cut, but was less wedded to this view than other economists.
"Overall, the mixed evidence and the UK economy's continued split personality leave plenty of room for debate over whether base rates have hit their cyclical trough," he said.
"Our own main case remains that the strength of consumer spending will continue for a sufficient length of time for clearer signs of US recovery to show through. Hence, this suggests that base rates have bottomed at 5 pct," he said.
Shaw said however that a rate cut in November cannot be ruled out.