In a promising turn for the British economy, the manufacturing sector experienced notable growth in January, buoyed by a rise in export orders from key international markets. This development contributes to a growing sentiment that the Bank of England may opt to maintain current interest rates during its upcoming monetary policy review.
Manufacturing PMI Signals Growth
According to the latest purchasing managers’ index (PMI), which gauges activity in the private manufacturing sector, the index climbed to 51.8 in January, up from 50.6 in December. This marks the strongest performance since August 2024, with any score above 50 indicating expansion. The survey, which encompasses responses from around 650 manufacturers, highlighted a resurgence in new export orders for the first time in four years, particularly from Europe, the United States, and China.
Rob Dobson, a director at S&P Global Market Intelligence, remarked, “UK manufacturing made a solid start to 2026, showing encouraging resilience in the face of rising geopolitical tensions.” This reflects a positive shift in the sector’s outlook, as optimism regarding future performance reached its highest level since before the autumn budget of 2024.
Economic Confidence on the Rise
The latest figures are part of a broader narrative suggesting that the UK economy is gaining momentum. A composite PMI that includes both manufacturing and service sectors indicated the most robust business activity since April 2024. Additionally, official statistics revealed that retail sales exceeded expectations for December, while GDP unexpectedly grew by 0.3% in November.
In a separate report published by the Institute of Directors (IoD), economic confidence among its members surged to its highest level in eight months in January. The confidence index rose from -66% to -48%, indicating a recovery from the lows experienced last year. Business leaders also reported improved confidence in their own firms, with the figure climbing to 14% from -4% in December.
Interest Rates and Inflation Outlook
These developments could influence the Bank of England’s decision-making regarding interest rates. The monetary policy committee (MPC) is expected to keep rates at 3.75% when it meets this Thursday, as the recent upturn in economic activity may dissuade members from considering a rate cut. Official data indicated inflation was at 3.4% in December, a decrease from the summer peak of 3.8%, yet still considerably above the Bank’s target of 2%.
While there are signs of economic recovery, the PMI survey also noted that “cost pressures are creeping higher,” driven by increased employer national insurance contributions, a rise in the minimum wage, and escalating commodity prices. Despite the uptick in orders, the manufacturing sector continues to face challenges. Job cuts within factories, although slowing to the lowest rate in 15 months, highlight ongoing concerns about employment, with the unemployment rate recently hitting 5.1%, the highest in nearly five years.
Diverging Opinions Within the MPC
Traders currently assess the probability of an interest rate adjustment as negligible. However, dissent within the MPC is likely, with external members Alan Taylor and Swati Dhingra expected to advocate for a rate cut. The committee’s recent decision to lower rates from 4% to 3.75% was marked by a narrow 5-4 vote, underscoring the divided opinions on the path forward.
Why it Matters
The recent growth in the UK manufacturing sector is not merely a positive statistic; it signals a potential shift in economic dynamics. As export orders rise and business confidence rebounds, these trends could reshape the economic landscape, influencing investment decisions and consumer behaviour. Maintaining interest rates in light of this growth may foster a more stable environment for businesses, ultimately supporting long-term economic recovery. The stakes are high, as policymakers balance the need for growth against the backdrop of ongoing inflationary pressures and labour market challenges.
