(Updates with market reaction, comments from economists)
By William Schomberg
LONDON, Aug 1 (Reuters) - British factories lost momentum in July and manufacturers were their most downbeat in nearly two years, a survey showed on Wednesday, but the data was unlikely to deter the Bank of England from raising interest rates on Thursday.
The weak domestic demand highlighted in the IHS Markit/CIPS UK Manufacturing Purchasing Managers’ Index (PMI) added to other signs of a largely sluggish British economy facing an uncertain exit from the European Union in less than eight months’ time.
The PMI slipped to its second-lowest level since late 2016 at 54.0, down from 54.3 in June and weaker than a median forecast of 54.2 in a Reuters poll of economists.
Rob Dobson, an IHS Markit director, said the sector — which accounts for 10 percent of the British economy — had provided no meaningful boost to economic growth so far this year.
“The financial markets still seem to have an interest rate increase nailed on for August,” he said, referring to Thursday’s policy announcement by the BoE.
“However, if the combination of weaker growth and a softening of pipeline cost pressures at manufacturers is mirrored in the larger service sector, the Bank of England’s decision will be far from unanimous and they may even yet find some cause for pause,” he said.
The PMI for Britain’s services industry is due to be published on Friday but is likely to be shown to the BoE’s policymakers ahead of their rate decision.
A rise in the BoE’s benchmark rate above its post-financial crisis levels is widely expected on Thursday, even though Britain’s economy is growing only slowly.
Sterling and government bond prices were little changed by Wednesday’s PMI survey.
Governor Mark Carney says the economy, with unemployment at a four-decade low, will generate too much inflation unless they raise borrowing costs gradually over the coming years.
But several private economists have challenged the need for a rate hike now, pointing to inflation that is below the BoE’s forecasts and no clear acceleration in wages, as well as the risk of a disruptive, no-deal Brexit.
Elizabeth Martins, an HSBC economist, said Wednesday’s PMI was unlikely to deter the BoE from raising rates on Thursday, but there were clouds on the horizon other than Brexit.
“While UK manufacturing export orders appear to have held up better in July, the poorer numbers from across the Channel may pose some risks going forward,” she said, also pointing to uncertainty about global trade.
A leading economic think tank said the BoE should raise rates but also said it would make a U-turn if Brexit talks sour or trade tensions with the United States escalate.
IHS Markit’s gauge of manufacturing output fell to its lowest level since March of last year and growth in new orders was the weakest since June 2017, even as export demand rose.
Manufacturers were their least confident in 21 months, reflecting concerns about Brexit and the value of the pound, and there was another warning sign in the first fall in two years in the production of intermediate goods, which are used in the process of manufacturing other products.
But the survey also showed the steepest rise in prices charged by factories since February as input costs continued to grow strongly, albeit a bit more slowly than in June. (Reporting by William Schomberg; Editing by Hugh Lawson)