UK manufacturing blues unlikely to deflect BOE from monetary tightening

● Output growth from sector at weakest rate in 16 months, according to PMI study

A rise in interest rates was still on the cards today despite output from Britain’s manufacturing sector growing at its weakest rate in nearly a year and a half.

The latest Markit/cips UK manufacturing purchasing managers’ index (PMI) – released yesterday – showed a reading of 54 for July, lower than the 54.3 for June. While any figure above 50 denotes output growth, it marked the weakest rate in 16 months. Economists had been expecting a reading of 54.2 for July.

Rob Dobson, a director at IHS Markit, which compiles the survey, said: “UK manufacturing started the third quarter on a softer footing, with rates of expansion in output and new orders losing steam.

“The upturn in the sector has eased noticeably since the back-end of 2017, meaning that manufacturing has failed to provide any meaningful boost to headline GDP growth through the year-so-far.”

He said it raised questions about the likelihood of a widely-anticipated rate hike by the Bank of England today.

“If the combination of weaker growth and a softening of pipeline cost pressures at manufacturers is mirrored in the larger service sector, the Bank of England’s decision will be far from unanimous and they may even yet find some cause for pause,” Dobson noted.

Lee Hopley, chief economist at the manufacturers’ organisation EEF, said a number of risks, including global trade disruptions and uncertainty over Brexit, had become more prominent over recent months but added that a rate hike was still likely.

She said: “This is it in terms of data ahead of the [rate] decision. With on-going indications of expansion, some support from overseas demand and continued signs of price pressures this shouldn’t dissuade those voting for a rate rise.”

Howard Archer, chief economic advisor to the EY Item Club, added: “While it has recently become a closer call, we believe the Bank of England is still more likely than not to raise interest rates to 0.75 per cent after the August meeting.

“The late-june meeting had seemingly opened the door pretty wide to an August hike with the number of [monetary policy committee] members favouring an immediate rate hike to 0.75 per cent rising to three. The minutes of the meeting were modestly more hawkish. However, the odds of an interest rate rise [today] look to have now widened given lower-than-expected inflation in June, the recent relapse in earnings growth and heightened political/brexit uncertainties.”