Factory gate prices come in sharply below expectations

FEARS that the Bank of England will raise interest rates in the next few months began to recede yesterday as prices at the factory gate came in sharply below expectations.

The official index of prices of manufactured goods was unchanged in May, according to figures released yesterday, soothing fears in the money markets that inflationary pressure was growing.

Some economists had been alarmed by data showing a 0.7 per cent jump in prices at the factory gate in April alone. But the April figure was distorted by Budget increases in excise duties.

In May, inflation at the factory gate was instead eased by the pound's strength against the Euro, allowing manufacturers to reduce the cost of imports.

Economists said that the flat producer prices helped to vindicate last week's decision by the Bank of England to cut interest rates by a quarter of a point.

"[The prices] were very subdued - further justification for last week's rate cut," said Mark Wall, an economist at Deutsche Bank.

However, the FTSE 100 index of leading shares appeared to ignore the positive signs, falling 54.7 to 6430.1. Traders awaited the retail prices index, due to be published today.

The markets shrugged off the Labour Party's drubbing in the Euro elections. Analysts said the market had already priced in the widespread opposition to Britain joining the European single currency.

"I don't see it as an issue. Public opinion to the euro has been hostile for some months so this result is hardly a surprise," said Mark Miller at Morgan Stanley.

Roger Bootle, a leading economist and campaigner against British membership of the euro, said: "I am not sure Labour will be particularly worried but it does make it more difficult for the `yes' side and Tony Blair because it has revealed how strong the opposition is."

Jonathan Loynes, at HSBC, said he felt the recent opposition to the euro in Britain had much to do with the currency's weakness since its launch.

"If the euro zone economy recovers, and the euro with it, you may well see sentiment swinging back in favour," he said.