UK Manufacturing output fell by 0.5 per cent in March, its sharpest decline in six months.

Transport equipment output showed the most pronounced monthly fall, declining 1.3 per cent as car production slumped on falling export demand while output in the electricity, gas and water supply industries contracted by 1.3 per cent.

The March drop follows two months of growth when output increased by 0.4 per cent in January and February. Output in the first three months of this year fell by 0.2 per cent.

Experts say that these figures highlight the difficulties facing the Bank of England's Monetary Policy Committee as they start their rate meeting today. Paul Dales, of Capital Economics, an economic consultancy, said: "The fall in manufacturing output in March supports our view that the industrial sector will not be able to compensate for the consumer slowdown and makes this month’s MPC interest rate decision a closer call."

The output figure is expected to reduce first quarter GDP by 0.02 per cent. Howard Archer, chief UK and European economist at Global Insight, said he thought quarter-on-quarter growth could drop by between half and three-quarters by June.

He said: “We believe GDP growth could slow to just 0.2 per cent quarter-on-quarter in the second quarter of this year (down) from 0.4 per cent in the first quarter and 0.8 per cent in the second quarter of 2007."

But the MPC members will also be looking at the new Inflation Report projections which are published next week.

Alan Clarke, UK economist at BNP Paribas, said: "[The projections] are going to have to take on board another 22 per cent increase in the price of oil, a 23 per cent rise in the price of wholesale gas.... All of these have a strong upward influence on the inflation projection."

"Moreover, there is a very real risk that the BoE governor will have to write not just 1 letter to the Chancellor for exceeding the 3 per cent upper boundary of the CPI target range, he may have to write 2 letters because inflation stays above 3 per cent for 3 months or longer. In this environment, we doubt the MPC will want to step up the pace of easing."

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