960423

CBI survey revives chances of UK rate cut-analysts

LONDON: Survey evidence showing that Britain's key manufacturing sector is still in the doldrums confirms the mixed picture of the UK recovery but also breathes new life into rate cut hopes, analysts said.

They said the Confederation of British Industry's (CBI) latest quarterly Industrial Trends survey had provided few surprises but argued strongly against expectations of a sharp pickup in economic activity in the second half of 1996.

"From the Treasury's point of view it provides further ammunition to cut rates," Kleinwort Benson's David Owen said.

"But from a more considered point of view the survey doesn't change anything," Owen said.

He noted that any likelihood of another 25-basis point rate cut in Britain's six percent base rate next month would probably hinge on preliminary estimates of first quarter Gross Domestic Product data due on April 29. UK rates have been cut by 75 basis points in three stages since last December.

"The overall message is don't rule out another rate cut...I think the bias will remain towards an ease although I personally think we've seen the last rate cut," Yamaichi International's Nigel Richardson said.

The CBI said that UK manufacturing remained static in the four months to April despite a pickup in the overall economy, with orders still flat especially in the export sector.

But CBI economic affairs committee chairman Andrew Buxton said he did not think further rate cuts were a good idea given the fact that the domestic consumer sector was strong.

Merrill Lynch Analyst Steve Andrews agreed. "This will be used as an argument by some to say that the Chancellor (Kenneth Clarke) should go for another rate cut but we think this would be foolhardy with other data suggesting a significant pickup in output towards the year-end," he said.

"We still think the strength of pent-up consumer demand will certainly start to feed through to inflation, if not by early next year then certainly towards the middle of it...our forecast is for rates to stay on hold until end-1996," Andrew said.

Yamaichi's Richardson also thinks the UK authorities will wait to assess further economic data carefully over the next few months before making any changes in interest rates.

The British economy grew by a relatively sluggish 2.5 percent in 1995 as a whole, revised down from a previous estimate of 2.7 percent. Economists say there is little hope of a pickup in exports with major European economies still weak.

Economists say another restraint on manufacturing output was the persistent stock overhang built up in 1995, which would continue to dampen growth until late this year.

"The manufacturing sector is still suffering from a stock overhang," Lloyds UK analyst Trevor Williams said.

"I think prospects for manufacturing next year are quite good but the recovery will probably not take place until the fourth quarter of this year," he added.

Short sterling futures picked up slightly after the survey but the December contract is still pricing in a half point rate rise by the end of 1996.-Reuter