UK factory growth stagnates in January, prices surge

Manufacturing growth almost dried up last month, with activity slowing to a two-and-a-half-year low, a survey showed, suggesting the economic slowdown is gaining momentum.

But record high factory gate inflation and surging input costs are likely to boost expectations that the Bank of England will have limited leeway to cut interest rates significantly this year.

The Chartered Institute for Purchasing and Supply/NTC purchasing managers' index fell to 50.6 last month, down from a downwardly-revised 52.4 in December and well below analysts' forecasts for a reading of 52.5.

It was the weakest growth in overall activity since August 2005 - with a score of 50.0 or more representing expansion - as output growth decelerated to its slowest in more than a year and new orders from home and abroad contracted.

The survey "does highlight the difficult job the Bank of England's monetary policy committee faces over 2008," said George Buckley at Deutsche Bank. "Growth is weakening and there are very strong price pressures, making their job very hard."

The Bank is expected to cut interest rates from the current 5.5 per cent this week, with markets still pricing in further cuts throughout the year.

Input prices shot up at their fastest rate since January 2005, with the index rising to 69.3 from 64.5 in December. Output price inflation accelerated to 57.9 from 55.6, reaching its strongest rate since the series began in 1999.

Manufacturers have been faced with record oil prices and rising food costs in recent months and are trying to pass on some of those costs to customers.

Policy-makers have voiced concern in recent weeks that inflationary pressures are building and could drive inflation well above the government's two per cent target this year, making interest rate policy difficult in the face of a slowing economy.

Inflation expectations are also running at record highs, leaving the Bank with the tough task of trying to convince the public it is taking inflation seriously at the same time as probably having to cut interest rates to shore up the economy.