Interest Rate Cut On The Way?

The UK’s economy has been in the spotlight again with news that British factory output unexpectedly fell in September – prompting the possibility of a Bank of England interest rate cut.

While not hugely important on its own, this is the first annual decrease in a year and a half, official data showed, and may at the very least prompt a hold on interest rate.

Most economists have said they expect the Bank of England to hold interest rates at 5.75 per cent on Thursday but signs of weakening across the whole economy have raised the chances of a cut.

"A no change decision is not a done deal and we see a significant chance of a cut," said Philip Shaw, chief economist at Investec.

The new figures from the Office for National Statistics (ONS) said manufacturing output fell 0.6 per cent on the month, compared with expectations of an unchanged reading, and the largest monthly fall since February.

On the year factory output was down 0.1 per cent, against forecasts of a reading of 0.6 per cent growth, and this was the first annual fall since February 2006.

At the same time, sterling fell against dollar and interest rate futures rose after the data which came alongside a weaker than expected services sector survey, indicating that the economy is softening in the wake of higher interest rates and the credit crunch.

The broader measure of industrial production activity fell 0.4 per cent on the month and 0.2 per cent on the year - also well below expectations.

The ONS said the figures were likely to lead to a downward revision of 0.04 percentage points to third quarter GDP growth. The first estimate showed 0.8 per cent quarterly growth.

The economy grew at its fastest annual rate in more than three years in the third quarter, according to that initial estimate. The ONS said the electrical and opticals sector contributed most to industrial weakness in September.

See: Cautious UK Economy Will Survive World Crisis

(BMcC)