UK output sums up interest-rate dilemma for BoE


LondonFor a picturebook example of the dilemma facing Bank of England (BoE) policymakers, look no further than the UK manufacturing industry.

On the downside for the economy, demand and confidence at factories is declining and investment is weakening, according to a survey from the Confederation of British Industry. But, in a sign of a potential squeeze that could intensify price pressures, the percentage of firms operating below capacity is the lowest in almost two decades and unit costs look elevated.

The survey demonstrates the complexity of the economy that the Monetary Policy Committee is trying to negotiate as members diverge on the need for an interest-rate increase. Some, including governor Mark Carney, said reduced growth potential poses an inflation risk and action may be warranted within months. For others, there’s little sign that headline price growth — fuelled by the weaker pound — is filtering into wages.

There’s also the fact that the economy appears weaker than in recent years, with tomorrow’s data forecast to show an expansion of 0.3% in the three months through September. That would match the pace of the previous two quarters, though it’s half the average since 2012.

Despite that, a majority of economists expect the BoE to raise its key rate by 25 basis points to 0.5% on Nov 2, which would be the first increase in a decade. Jane Foley, senior currency strategist at Rabobank, is among those predicting a hike, though she says it won’t kick off a tightening cycle. — Bloomberg