Industry pleads for rate respite

Manufacturers last night pleaded with the Bank of England to hold back from a rise in interest rates tomorrow after news that a recovery in industry stalled over the summer.

Amid City speculation that the Bank's monetary policy committee might increase borrowing costs for the first time in more than three and a half years, business groups said a rise could plunge manufacturing back into recession.

Britain's factories cut output by 0.6% in August, wiping out the increases seen over the previous two months, according to the Office for National Statistics.

In a further sign that the economy could be vulnerable to higher borrowing costs, Bank of England figures showed that mortgage equity withdrawal, seen as a key driver of consumer spending, slowed in both of the first two quarters of the year.

"Until the Bank has firmer evidence of recovery, especially in manufacturing, it should hold off from raising interest rates," said Steve Radley, chief economist at the Engineering Employers' Federation.

David Kern, chief economic adviser to the British Chambers of Commerce, agreed. "These figures do not alter the basic picture of deep and prolonged manufacturing weakness: the recovery still faces many hazards," he said, describing yesterday's news as a "sobering up" after upward revisions to official GDP data last week suggested a manufacturing recovery had begun.

The ONS said the decline in output in August was led by the transport equipment sector, where production fell 2.9% over the month, and by machinery and equipment manufacture, down 3.3%.

Meanwhile, the surprise fall in mortgage equity withdrawal raised fears that consumers could tighten their belts before manufacturing is ready to take over as the driver of economic growth.

Bank of England figures showed mortgage equity withdrawal slipped by £200m in the second quarter, to £11.3bn, and revisions to data for the start of the year suggested it may have peaked, at £12.1bn, in the final quarter of 2002.

As a percentage of take-home pay, the Bank said mortgage equity withdrawal had slipped to 6%, from 6.2% in the first three months of the year - well down on the 7.7% it reached at the height of the late-1980s property boom.

With yesterday's manufacturing figures showing Britain's factories still producing less than when Labour came to power in May 1997, Michael Howard, shadow chancellor, said: "These figures give the lie to Gordon Brown's claims about manufacturing. Last week, the chancellor talked of delivering 'modern manufacturing strength', but manufacturing investment has fallen by a quarter under Labour, while 687,000 manufacturing jobs have been lost.

"The gap between Gordon Brown's rhetoric and the reality of his record grows wider day by day."

Despite the August fall, the ONS believes manufacturing output is rising at an annual rate of 1%. Most analysts expect the Bank to leave rates on hold tomorrow while they wait for firmer evidence of an economic upturn.