UK manufacturing bounces back

The chances of an interest rate cut this year receded almost completely today following evidence of a marked improvement in Britain's manufacturing sector.

According to the Chartered Institute of Purchasing and Supply/RBS Purchasing Managers' Index (PMI), manufacturing grew much more strongly than expected last month.

The PMI index rose from 51.0 in March to 54.1, its highest level since November 2004. Any reading above 50 signifies expansion.

Today's data should raise the Bank of England's expectations that the long-awaited rebalancing of the British economy from consumer spending to production is finally taking place.

Manufacturing, which accounts for 16% of UK output, showed strength across the board in the latest PMI survey.

The new orders index rose to 56.4 from 52.3 in March, its highest level since mid-2004. Export orders also picked up, rising to a five-month high of 52.5.

In addition, the pick-up is finally feeding through to more jobs. The employment index rose above 50, an indication of rising employment in the sector for the first time in 13 months.

"The message is clear, manufacturers' confidence is high and, perhaps, finally even the UK industrial sector is joining the global industrial party," said John Butler of HSBC.

"Although this survey carries a lot of weight with the MPC, the only question is whether this optimism translates into strong output in the official data."

The Bank of England is almost certain to leave borrowing costs unchanged when its monetary policy committee (MPC) makes its decision on Thursday, and will probably do likewise for the rest of the year.

"The evidence of marked improvement in the manufacturing sector further guarantees there will be no interest rate cut this Thursday," said Howard Archer of Global Insight, who had expected a cut later in the year.

"Indeed, we admit it is looking increasingly questionable whether interest rates will be trimmed further."

Meanwhile, the housing market remains strong. The latest data from the British Bankers Association (BBA) showed that household borrowing for house purchase in March remained comparable with the boom in 2003.

The number of mortgage approvals for house purchase was 85,698 in March, the highest since June 2004 and 33% higher than March last year.

In another sign that the second quarter was getting off to a good start, retail sales volumes for April came in ahead of City expectations.

The Confederation of British Industry's monthly distributive trades survey (DTS) showed that while 36% of retailers said sales volumes were down on a year ago, 38% said they were up. The balance of +2% contrasted to -16% in March.

"April's survey could be interpreted as an early sign of a mild revival on the high street, but let's not jump the gun," said John Longworth, the chairman of CBI's DTS panel said.

"The economy as a whole is still working below capacity and recent improvements in the manufacturing sector have not been led by demand for consumer goods."

The CBI said that Easter falling in April this year but in March in 2005 gave sales a boost compared with a year ago.