UK factories lose steam on eve of Bank of England rate decision

LONDON, Aug 1 (Reuters) - British factories lost momentum in July and manufacturers were their most downbeat in nearly two years, a survey showed on Wednesday, raising fresh questions about the need for an expected Bank of England interest rate hike on Thursday.

FILE PHOTO: A worker applies a protective coating to a bolt inside the factory of precision engineering company Produmax in Shipley, Britain May 8, 2018. REUTERS/Phil Noble/File Photo

The IHS Markit/CIPS UK Manufacturing Purchasing Managers’ Index (PMI) slipped to its second-lowest level since late 2016 at 54.0, down from 54.3 in June and weaker than a median forecast of 54.2 in a Reuters poll of economists.

Rob Dobson, an IHS Markit director, said the sector — which accounts for 10 percent of the British economy — had provided no meaningful boost to economic growth so far this year.

“The financial markets still seem to have an interest rate increase nailed on for August,” he said, referring to Thursday’s policy announcement by the BoE.

“However, 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,” he said.

The PMI for Britain’s services industry is due to be published on Friday but is likely to be shown to the BoE’s policymakers ahead of their rate decision.

A rise in the BoE’s benchmark rate is widely expected on Thursday, even if Britain’s economy is growing only slowly ahead of its departure from the European Union in less than eight months’ time, the terms of which remain unclear.

Governor Mark Carney and other top officials have said that despite its sluggishness, the economy will generate too much inflation unless they raise borrowing costs gradually over the coming years.

But several private economists have challenged the need for a rate hike now, pointing to inflation that is below the BoE’s forecasts and no clear acceleration in wages, as well as the risk of a disruptive, no-deal Brexit.

Wednesday’s factory sector survey provided further signs that might add to the doubts about a rate hike at this point.

Its gauge of manufacturing output fell to its lowest level since March of last year and growth in new orders was the weakest since June 2017, even as export demand rose which only underscored the weakness of demand in Britain.

Manufacturers were their least confident in 21 months, the survey showed, reflecting concerns about Brexit and the value of the pound, and there was another warning sign in the first fall in two years in the production of intermediate goods which are used in the process of manufacturing other products.

But the survey also showed the steepest rise in prices charged by factories for their products since February as their input costs continued to grow strongly, albeit a bit more slowly than in June.

Reporting by William Schomberg; Editing by Hugh Lawson

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