LONDON, Oct 7 - Britain's manufacturing sector unexpectedly went into reverse in August after having shown signs of recovery, data showed on Tuesday, dampening expectations the Bank of England would soon raise interest rates. Blaming a slump in car and machinery output, the Office for National Statistics said manufacturing output, which accounts for a fifth of the British economy, contracted by 0.6 percent on the month -- the worst performance since October last year. The news will cement expectations that the Bank of England will leave interest rates on hold at 3.5 percent at its monthly meeting later this week and probably for several months to come. The number totally wrongfooted City economists who had made an average forecast of a monthly rise of 0.2 percent, although a few had been concerned about falling car production in the month. Financial markets reacted sharply to the first negative piece of news on the world's fourth largest economy for many weeks. Gilts and short sterling interest rate futures jumped on the perception that interest rate rises had suddenly become much less imminent.
The FTSE 100 index of leading shares doubled its early losses to be down 14 points on the day at 4,256. The pound eased slightly against the dollar to $1.6765 and against the euro to 70.18 pence. "The numbers reiterate our view that the survey data is improving but until we get hard data through and some improvement in the hard data, it seems unlikely that we are going to see a huge turnaround in our forecasts for interest rates," said Robyn Barnett, economist at UBS in London.
DODGY DATA?
Peter Dixon at Commerzbank in London said he was suspicious of the data in the wake of last week's huge upward revision to second quarter gross domestic product figures by the ONS. "You've got to say: Well, are these numbers actually as bad as the ONS makes them out to be? They don't seem to match up with some of the surveys we had earlier." They were referring particularly to the CIPS/ purchasing managers' index which have been giving strong readings in recent months, particularly for industrial new orders. A recent Confederation of British Industry survey had a weaker tone, however. The ONS said there was a 2.9 percent fall in transport equipment output which contained a similar drop in car production as well as a fall in shipbuilding and aerospace output. There was also a 3.3 percent slump in machinery and equipment output. Without the falls in the two sectors, output would have been flat, statisticians said. On a three-monthly basis, which smoothes out monthly fluctuations, there was better news, however. Output was up 0.5 percent from the previous three months and 1.4 percent up on the same period last year. The latter figure was the best since March 2001. Industrial production, which adds in utility and North Sea oil and gas production, suffered a fall on the month and the year of 0.9 percent. The monthly fall was the worst since January and was mainly due to a fall in oil output. The three-monthly numbers were better, however. There was a rise of 0.5 percent from the previous three months and an increase of 0.7 percent from the same month a year earlier.//