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U.K. August Manufacturing Activity Surges Unexpectedly

British manufacturing activity surged to a three-year high in August, driven by the strongest production growth since 1994, a survey showed on Monday in a sign that rising interest rates are not stifling industry.

The Chartered Institute of Purchasing and Supply/NTC said its purchasing managers' index rose to 56.3 last month from an upwardly revised 55.9 in July, the highest level since July 2004 and well above analysts' forecasts for an easing to 55.0.

With any reading above 50 indicating expansion, CIPS/NTC said the sector was now enjoying its longest period of sustained growth in 12 years.

Manufacturing output growth soared to 60.4 from an upwardly revised 58.0 in July -- the fastest expansion in nearly 13 years.

The figures tally with a strong survey from the Engineering Employers' Federation which showed firms are upbeat about the future while enjoying the strongest rate of growth in output and new orders since 1995 in the third quarter.

Such strength boosted speculation that industry could weather one more interest rate rise this year, after five increases to 5.75% since August last year.

"The survey is a reminder that the economy is still performing pretty well, and that an eventual further interest rate hike is still very possible despite the current turmoil in global credit and financial markets," said Howard Archer, an economist at Global Insight.

While the domestic market contributed most to growth in August, new export orders improved markedly with a reading of 55.8 -- the strongest rate of expansion since January 2004.

Overall, new orders are basking in their most sustained period of growth in more than 12 years. Employment growth hit a three-year high, CIPS/NTC said, with the jobs index rising to 52.5.

Prices Come Off the Boil

However, Bank of England policymakers may be relieved to see price pressures cooling at both the factory gate and further up the industrial pipeline.

Input costs, although still strong, grew at their weakest rate since April, with the input prices index easing to 64.1 from a downwardly revised 66.5. The output price reading cooled to 56.1 from July's record high of 57.5. August's reading is the weakest since March.

Given a fall in consumer price inflation below the government's two % target in July, dovish policymakers may now argue that another rate rise is no longer necessary to contain inflation over the medium term.

"Inflationary pressures did ease somewhat, thus negating the need for imminent policy tightening from the BoE," said James Knightley, an economist at ING.

Investors had fully priced in a rise to 6.0% this year before turmoil on financial markets stemming from a credit crunch forced a revision of hawkish predictions for global interest rates. The Bank of England will announce its latest interest rate decision on Thursday.