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Manufacturing growth accelerates

LONDON (Reuters) - Factory activity accelerated at its fastest pace in 2-1/2 years last month and firms hiked prices at their sharpest rate since records began 8 years ago, a survey showed on Thursday.

Factory activity accelerated at its fastest pace in 2-1/2 years last month and firms hiked prices at their sharpest rate since records began 8 years ago, a survey showed on Thursday. REUTERS/File

The pick-up in prices will make uncomfortable reading for the Bank of England, which has already raised interest rates by 75 basis points since last August to cool inflation and reinforced speculation it will hike again, boosting sterling.

The CIPS/RBS Purchasing Managers Index rose to 55.4 in February from 53.2 in January, marking the strongest growth in the manufacturing sector since July 2004. Analysts had expected a reading of 53.0.

The survey showed the pound’s continued strength failed to dent demand for British goods, with export orders expanding at their fastest rate in more than three years, and boosting total orders growth to its highest since July 2004.

“The UK manufacturing industry continues to defy the tightening of monetary policy,” said Geoffrey Dick, economist at RBS. “Combined with the strongest reading on output prices and the ongoing robustness of the service sector this is one for the hawks on the MPC.”

The CIPS/RBS figures mirror a survey from the Confederation of British Industry last month that showed factory orders expanding at their quickest pace in 12 years.

Policymakers will be alarmed by news that the prices charged by firms rose at their fastest rate since CIPS started polling for that information in November 1999, even though growth in raw material costs eased in the month.

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“Signs that inflationary pressure is still building in the manufacturing sector, coupled with strong manufacturing growth, should provide additional ammunition for the more hawkish members of the Monetary Policy Committee,” said Andrew McLaughlin, RBS Group chief economist.

The output prices index jumped to 56.9 in February from 54.2 in January, while the input prices index eased to 60.8 from 61.7.

Thursday’s figures also showed firms took on new staff to cope with the increased demand, propelling employment growth to its fastest pace in nearly two years.

This may also stoke concerns that workers will seek inflationary pay rises in response to tightening labour market conditions and increased productivity.

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