Solid UK manufacturing survey 'will add to MPC rate confidence'

UK manufacturing activity and input prices both increased more than expected in October, a survey revealed on Wednesday, which was felt likely to increase the Bank of England's confidence about raising interest rates and its concerns about inflation.

The IHS Markit/CIPS UK manufacturing purchasing managers’ index edged up to 56.3 after the previous month's PMI was revised up to 56.0 from 55.9, with the market's expecting a small fall to 55.8.

With a PMI above 50 signalling growth, the manufacturing sector has been on the rise for 15 months in a row, according to Markit's figures.

Economists said the survey will reassure the Bank of England that the economy is coping relatively well with the prospect of imminently higher interest rates, which are widely expected to be hiked on Thursday's Monetary Policy Committee meeting.

Total new order intakes rose at a substantial rate during October, Markit said, bouncing back from a weak prior month to put the manufacturing sector on a solid footing for at the start of the fourth quarter of the year.

Official figures earlier this month indicated the UK industrial output expanded 0.8% with manufacturing output growth of around 1% for the third quarter, more than reversing the second quarter's contraction.

Employment levels reached their highest rate in 40 months.

Production and new order volumes benefited from strong domestic demand and rising export inflows, while price pressures grew as input costs rose at the fastest pace in seven months to lead to the steepest rate of selling price inflation since April.

Rob Dobson, a director at IHS Markit, said the manufacturing sector looked to be achieving a quarterly rate of expansion close to 1% to sustain the solid pace of growth signalled by the official ONS estimate for the third quarter.

"The domestic market remained strong, whereas new export orders increased at a slightly slower pace, the latter showing signs of being hit by the recent strengthening of sterling," he said.

However, with price pressures continuing to build, he added: "Higher demand for raw materials, combined with increased supply-chain constraints, mean annual input price inflation is moving back into double-digit rates, which may feed through to higher pressure on consumer prices in coming months."

Economist Andrew Wishart at Capital Economics said the recent rise in oil prices was the cause of input prices picking up.

"Meanwhile, the output expectations balance – which offers the best correlation with the official data – was unchanged at 56.6, remaining consistent with quarterly manufacturing output growth of around 1%, the same pace as that recorded in Q3.

"Overall, then, today’s survey does nothing to alter our expectation that the MPC will increase Bank Rate by 0.25% tomorrow."

Samuel Tombs at Pantheon Macroeconomics agreed that the survey "will reassure the MPC that the economy is coping relatively well with the prospect of imminently higher interest rates".

He said the pickup in the new orders index "points to scope for the output index, which held steady at 56.6 in October, to rise a little over coming months", though small drops in the future activity and quantity of purchases indices "suggest that manufacturers are preparing for demand to weaken a little, perhaps in response to higher interest rates".

"Still, this deterioration in confidence probably is much more modest than the more dovish members of the MPC had feared," he added, while the pickup in output prices "likely will add to the MPC’s concerns that CPI inflation will fall only slowly next year".