The prospects of a cut in interest rates this month rose yesterday after growth in new manufacturing orders slumped to a two-year low.

The Bank of England’s rate-setting Monetary Policy Committee meets next week to decide whether to cut rates for the second consecutive month.

The Chartered Institute of Purchasing and Supply/RBS headline purchasing managers’ index fell to 52.9 in December, short of forecasts, and down from 54.3 in November.

The slump was driven by a steep fall in the new orders index, which came in at 51.7 from 55.0 a month earlier, giving little hope for a quick recovery.

A figure above 50 indicates expansion, but the headline manufacturing index has now given back all the gains it made in an unexpectedly robust November and is plotting a firmly negative course.

The slowdown adds to evidence of worsening economic headwinds across the board, from falling house prices to a seizure in the interbank lending market. Economists already expect UK growth to slump to about 1.8 per cent this year, from 3.1 per cent in 2007.

The case for a rate cut was further bolstered by figures from CIPS/RBS suggesting that inflationary pressures eased as firms scrapped planned price rises because of thin forward order books. The input prices index fell to 62.7 last month from 65.1 in November, while the index gauging factory gate prices fell to 55.6, its lowest since March, from 57.5.

The view that the cost of borrowing will be cut sooner rather than later was bolstered by the minutes of last month’s meeting of the Monetary Policy Committee, which showed a 9-0 vote to cut rates by a quarter of a point to 5.5 per cent, a move that threw a lifeline to struggling home-owners.

Many analysts have already pencilled in two more quarter-point cuts by the summer with some suggesting that rates will fall to 4 per cent by the spring of 2009.

However, most economists expect the Bank to hold tight until February. Upcoming figures on the retail sector’s performance in the run-up to Christmas will also figure in policymakers’ minds.

Any delay is likely to meet an angry reception from manufacturers. Yesterday’s figures also indicated that the pound’s strength against the weakening dollar has hit demand for British goods overseas, with the export orders balances falling to 52.4 from 55.3.

Times Recommends

• ‘Lame duck’ fear for FSA as chief quits
• Storm over bailout of EU's most ailing economy
• Northern Rock to drop 100% savings guarantee