June 21, 2007 / 10:22 AM / 13 years ago

Factory pricing intentions up at slower rate

LONDON (Reuters) - Manufacturers plan to raise prices at a slightly slower rate this month than in May even as their order books swelled, according to a survey on Thursday, but interest rates are still expected to go up.

The Confederation of British Industry said its monthly manufacturing order books balance rose to +8 from +5 in May, matching the 12-year high it hit in March. Analysts had predicted an unchanged reading of +5.

The balance of firms expecting to raise their prices in the coming months eased to +16 from a 12-year high of +25 in May.

Analysts said while that may offer some comfort to policymakers concerned about the effect on inflation of firms’ growing pricing power, it would not dissuade them from raising interest rates again to curb price pressures.

Most in the market are convinced the Bank of England will follow up May’s quarter-point hike with another one in July after minutes of its June meeting showed four out of nine policymakers wanted to raise borrowing costs this month.

“The prices balance remains elevated by past norms; and with demand strong, the temptation will remain for manufactures to try and push through further price increases,” said Howard Archer, economist at Global Insight.

“An interest rate hike to 5.75 percent remains very much on the cards for July.”

TIGHT CAPACITY

The survey also showed that firms expected to ramp up output, with the expectations balance rising to +25 from +18 — the highest reading since February.

That tallies with other recent surveys that suggest firms are working at full tilt to keep up with demand, and comes after a report from the Bank’s regional agents showed they expected capacity constraints to be their tightest in nearly a decade.

Another sign that firms are struggling to meet demand was in the CBI’s stocks of finished goods balance, which fell sharply to -2 in June, its lowest in nearly 20 years.

“This survey is therefore telling us that in the manufacturing sector activity remains strong, prices elevated and spare capacity limited,” said George Buckley, economist at Deutsche Bank.

Those are exactly the indicators that BoE Governor Mervyn King, who wanted to raise interest rates this month, warned would have to ease if interest rates were not to rise further.

“The message: further tightening required,” Buckley said.

The survey was conducted between May 24 and June 13.

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