October 23, 2007 / 10:20 AM / 12 years ago

Factory orders fall sharply

LONDON (Reuters) - Factory orders unexpectedly fell in October as exports weakened at their sharpest rate in a year, a survey showed on Tuesday.

The Confederation of British Industry said its monthly manufacturing order books balance fell to -6 from +6 in September, well below expectations for a slight weakening in growth to +4.

The export orders balance slipped to -9, the lowest since October 2006, from -2, suggesting that a strong pound is weighing on demand for British goods abroad.

Firms were also less confident about putting up prices, with the average prices expectations balance easing to +14 from +16 in September.

The figures did little to alter expectations that the Bank of England will keep interest rates on hold at 5.75 percent for the time being, but may cut borrowing costs next year.

“It is clear that higher interest rates, the strong pound and a global slowdown are starting to have some impact,” said Paul Dales of Capital Economics.

“But with that impact so far only modest, and with the prices balances having remained fairly high, the Monetary Policy Committee can afford to wait a little longer before cutting rates.”

A quarterly survey of CBI members, published at the same time, showed manufacturers were at their most pessimistic about their business prospects since the beginning of last year, with the business situation balance slipping to -13 from -2 in July.

The quarterly balances showed firms were less optimistic about order volumes in the next three months and also planned to spend less on investment.

And signs that capacity constraints are easing may also provide some comfort to policymakers worried about building inflationary pressures in the economy.

The percentage of firms operating below capacity increased to 60 percent in October from 50 percent in the July survey, the highest proportion in nearly two years.

“There are some tentative signs that the pace of demand and output growth will edge lower in coming months,” said Ian McCafferty, CBI chief economic advisor.

“Domestic demand is now starting to respond to higher interest rates and exporters are feeling the impact of the weaker dollar.”

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