UK factory growth slows, price pressures rocket again: Markit PMI

By Andy Bruce

LONDON (Reuters) - British manufacturing growth cooled last month as cost pressures lurched higher, according to a survey that could put the Bank of England a step closer to raising interest rates, despite a murky outlook ahead of Brexit.

Monday's IHS Markit/CIPS UK Manufacturing Purchasing Managers' Index (PMI) fell to 55.9 from a downwardly revised 56.7 in August, undershooting the consensus of 56.4 in a Reuters poll of economists.

By contrast, euro zone factories had their best month since early 2011.

While the PMI survey signalled solid expansion at British factories, helped by robust exports, softer growth in new orders and a slowdown among producers of investment goods raised concern about the months ahead.

Britain's economy initially withstood the shock of the June 2016 vote to leave the European Union. But growth began to slow sharply this year as inflation rose following the pound's post-Brexit vote plunge, hitting households.

Against that background, the BoE surprised investors last month when its officials said they were likely to raise interest rates soon, citing a reduced tolerance for above-target inflation.

Analysts said Monday's survey - which showed a resurgence of price pressures - would do little to alter this judgement.

"While the weaker economic backdrop is unlikely to deter the Bank from hiking in November, it does mean that the chances of a series of rate hikes after that are low," said James Smith, economist at ING.

Costs paid by factories for goods shot up at the fastest pace since March, the PMI showed, spurred in part by an increase in commodity prices and capacity constraints in the supply chain.

"Emerging problems in the supply chain, signalled by lengthening lead times, are likely related to the subdued investment performance of the past few quarters," said Lee Hopley, economist at manufacturing association EEF.

IHS Markit, which compiles the survey, said this would probably exert further upward pressure on prices, dent profitability and potentially disrupt production schedules in coming months - boosting the case for higher rates.

The PMI's gauge of British manufacturing export orders slowed for a second month. While still much stronger than its historical average, it lagged the euro zone's by some distance.

A majority of economists polled by Reuters last week expect the BoE will raise interest rates in November, although most also thought it would be a mistake to hike now.

Official economic growth figures published last week showed manufacturing output contracted 0.3 percent in the second quarter compared with the first quarter.

PMIs for the construction industry and all-important service sector are due to be published on Tuesday and Wednesday.

(Editing by Janet Lawrence)