Pressure grows for rate cut

Pressure mounted on the Bank of England last night to cut interest rates as a raft of data showed Britain's manufacturing sector continuing to weaken and a further cooling of consumer demand.

The British Chambers of Commerce (BCC) and a leading think-tank, the National Institute for Economic and Social Research (NIESR), both called for the Bank of England to start cutting the cost of borrowing, as has the CBI chief, Digby Jones, this week.

As they did so, the FTSE 100 index jumped to a three-year high of 5,230 as a fresh rise in oil prices to near record levels above $60 a barrel boosted the shares of BP and Shell.

High oil prices may be good for oil companies but are not good for economies, say analysts, as they drive up firms' costs and take money out of consumers' pockets.

David Kern, economic adviser to the BCC, said: "The manufacturing sector's acute underlying weaknesses highlights the need for an early interest rate cut and we hope the Bank will act promptly."

The Bank's nine-strong monetary policy committee will announce their latest decision on interest rates today. Despite yesterday's weak data, City analysts expect the MPC to leave the cost of bor rowing unchanged at 4.75% and to start cutting rates next month after it has completed its latest quarterly inflation report. Last month two of the MPC's nine members voted for a rate cut.

Simon Hayley, of Capital Economics, said: "We hold to our forecast of a rate cut at the August meeting and we still expect rates to fall to a below-consensus 4% by the end of the year."

The NIESR said yesterday that it forecast quarter-on-quarter growth in the second quarter to be 0.3% - this is half its long-run average. Martin Weale, director of NIESR, said: "This data suggests to us that interest rates should now be reduced." Economists warned that the manufacturing sector could be on the brink of recession as the latest three-month data from the Office of National Statistics showed that it had contracted by 1.9% for the three months to the end of May compared with the previous three months.

The manufacturing sector declined in the first quarter of the year and with only a month left of the second quarter, a technical recession - two successive quarters of contraction - looks increasingly likely.

All 13 sub-sectors of the manufacturing sector declined for the three months to May. Apart from June 2002 - when the pattern of production was greatly distorted by the Queen's jubilee - this was the first time this has happened since May 1980.

Pulp, paper, printing and publishing, which includes newspapers, was the worst performing sector, declining by 3.6% for the three months to May.

On a monthly basis, the data was slightly more positive with growth broadly flat in May relative to the previous month.

Signs of continued weakness in the consumer sector also emerged yesterday. The Bank of England estimated that the amount of mortgage equity withdrawal - money borrowed against a property to spend on other things - in the first quarter of the year had tumbled by 60% from a year earlier to £6.4bn.

The Society of Motor Manufacturers and Traders said new private car registrations in the month of June had declined by 5.7% from the same time last year. Car registrations are a good indicator of whether consumers are willing to spend on big-ticket purchases.

The British Retail Consortium said that prices in shops fell by 0.5% last month compared with the same time last year, showing that strong competition in the high street is helping to restrain price rises.