August 1, 2007 / 9:21 AM / 12 years ago

Manufacturing grows at fastest pace in 3 yrs

LONDON (Reuters) - Manufacturing activity accelerated unexpectedly last month to its fastest pace in three years and output price inflation hit its highest level in at least 15 years, a survey showed on Wednesday.

An assembly worker in a file photo. Manufacturing activity accelerated unexpectedly last month to its fastest pace in three years and output price inflation hit its highest level in at least 15 years, a survey showed on Wednesday. REUTERS/File

The central bank is widely expected to leave borrowing costs unchanged this week but the surprisingly strong readings raised expectations of higher interest rates to come.

“The data is unlikely to tip the Bank of England into hiking rates this week but it does add another warning that rates are likely to head higher at some point soon,” said Gavin Redknap at Standard Chartered Bank.

The Chartered Institute of Purchasing and Supply/NTC purchasing managers’ index rose to 55.7 last month from an upwardly revised 54.7 in June — the highest since July 2004 and compared with analysts forecasting an easing to 54.0.

Any reading above 50.0 indicates expansion. The sector has now grown for 24 successive months.

Evidence that inflationary pressure is continuing to build will be of particular concern to the Bank, which has already raised interest rates five times in less than a year.

Average factory gate prices rose at the fastest rate since the series began in January 1992 while input price inflation rose at its fastest rate in almost a year.

DOMESTIC IMPETUS

Domestic demand appeared to be driving the gains as new exports orders grew at the slowest rate since the start of the year. New orders overall, however, rose at their fastest pace in 13 months.

Manufacturing employment rose for a seventh successive month with firms creating more jobs than at any time in the past three years.

The strength of Britain’s manufacturing sector contrasts with that of the euro zone where factory activity cooled last month, with the four big economies of Germany, France, Italy and Spain all showing moderation.

“The UK manufacturing economy carried its robust start to 2007 into the second half of the year,” said Rob Dobson, an economist at NTC.

The survey is also at odds with data from the Confederation of British Industry which showed British factory orders fell in July at their fastest rate since the start of the year.

Many analysts took the CBI survey as the first sign that higher rates and the strength of sterling were beginning to hit the industrial sector and may now be forced to rethink.

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