Faltering output raises hopes of a rate cut

Manufacturing output was disappointingly weak in November, reigniting hopes that base rates will fall again, maybe as early as next week when Kenneth Clarke and Eddie George hold their first monetary meeting of the year, writes Paul Wallace.

The stagnation in output occurred as industry grappled with bloated inventories and slack demand in key markets at home and abroad. With both factors likely to remain in place for the next few months, the City is expecting interest rates to be lowered again.

"There is a good chance that rates may come down as early as next week," said Ian Shepherdson, UK economist at HSBC Markets. He pointed out that there was no reason why rates should not be cut two months in succession, particularly after a reduction of only a quarter point in December. With the Government's ability to run its full term of office now seriously endangered, the Chancellor would be looking for a quick cut in rates.

However, most analysts are expecting a decision to be postponed next week.

The latest picture of manufacturing production was downbeat compared with a year earlier. In the three months ending November, output rose at an annual rate of under 1 per cent, compared with the near 6 per cent increase chalked up a year before. According to official statisticians, the trend rate of growth is now just half a per cent.

Indeed output fell in the three months ending November compared with the previous three months, the first such decline for over two years.

The return to normal weather conditions in November brought a sharp rise in gas extraction and supply, which helped to bring about a recovery in the broader industrial production index, up by 0.5 per cent on October.