Factory activity at two-year high

By Fiona Shaikh

LONDON (Reuters) - Manufacturing activity grew at its fastest rate in two years in October as new orders rose at their fastest in almost 6 years and firms started rebuilding their stocks, a survey showed on Monday. The CIPS/Markit purchasing managers index of manufacturing activity rose to 53.7 in October from an upwardly revised 49.9 in September, signalling the fastest pace of growth since November 2007 and beating forecasts for a rise to 50.0.

The improvement was driven by a surge in new orders, with the index for this measure jumping 6.8 points on the month to 59.5, the highest since January 2004, when it was 61.5.

The figures suggest the economy made a strong start to the final quarter of this year, having suffered its longest recession on record.

Gilt futures fell almost 20 ticks and the pound rose almost half a cent against the dollar, as investors bet that it slightly lessened the chance of the Bank of England deciding to inject more stimulus into the economy this week.

However, analysts questioned whether the survey was a reliable gauge of what is really happening in the economy.

"It does change the balance of risks ahead of the BoE meeting, but we're still sticking with our forecast for more Quantitative Easing," said Brian Hilliard, economist at Societe Generale.

"The disappointment with Q3 GDP was more on the services side than manufacturing, so Wednesday's services PMI will be important."

The central bank will decide on Thursday whether to increase its 175 billion pound quantitative easing programme aimed at boosting the economy.