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UK manufacturing down as rate cut of 0.25% follows

British manufacturing output fell unexpectedly in December, the second month running, data showed yesterday, adding to evidence that the economy slowed sharply at the end of last year.

The pound fell after the figures were released as investors took the view, later vindicated, that the Bank of England would follow with a quarter point rate cut to 5.25 percent later yesterday, with more in the months to come.

The British central bank said in a statement that it needed to balance the risk of "a sharp slowing in activity" against the danger of rising inflation.

Money markets show investors are already betting that interest rates could fall as low as 4.5 percent by the end of the year.

"It raises the risk that the Bank of England will have to do more than we think," said George Buckley, chief UK economist at Deutsche Bank. "The risk is they may have to either move quicker, or more substantially, to avert the weakness in the manufacturing sector."

Manufacturing output fell 0.2 percent for the month after a 0.1 percent fall in November. Analysts had forecast a 0.1 percent gain.

Weakness in manufacturing weighed on the broader measure of industrial production, which fell 0.1 percent for the month. Analysts had forecast a 0.2 percent gain.

With retail sales figures also showing a slowdown at the end of 2007, the poor manufacturing numbers raise the risk that Britain's fourth-quarter economic growth could be revised down.

The Office for National Statistics said yesterday's data alone would subtract 0.04 percent from the GDP reading.

Analysts said the manufacturing slowdown suggested that weaker global growth was more than offsetting the boost from a weaker currency.

After riding high at the start of last year, the pound has shed almost 10 percent on a trade-weighted basis since July.

"It's disappointing news given the relative weakness of Sterling over the past few months, which should give the sector a competitive boost," said Philip Shaw at Investec.

Weakness was broad-based but most notable in metals and metal products.
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