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THE OUTLOOK FOR INTEREST RATES

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The focus of the chancellor's concerns about the economy, and the main reason for his recent move to cut UK interes...
The focus of the chancellor's concerns about the economy, and the main reason for his recent move to cut UK interest rates, are developments in the industrial sector of the economy. The most recent data showed that industrial production fell 0.9% in October, reflecting a fall in energy output with unseasonal mild autumn weather, while manufacturing output rose a modest 0.2%. The current trend rate of growth of output appears to be close to only 1% a year.

The most worrying feature of current industrial weakness is the evidence of recent business surveys that companies have accumulated excess stocks and that order books remain relatively weak. The CBI survey, which has a reasonable record in tracking developments in the industrial sector, shows a net balance of just 2% of firms planning to increase output over the next few months, compared to 20% as recently as September. Firms will remain cautious about increasing output again until accumulated stock is worked off.

The chancellor will keenly review November's industrial output data, due to be released this Thursday, for further signs of weakness in a sector of the economy which will be crucial to the future direction of interest rate policy. A modest 0.1% rise in manufacturing output is forecast, with a slightly stronger gain in overall production reflecting a rebound in energy production with the return to colder weather.
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