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UK Manufacturing Strong On Global Growth, Weaker Pound

The UK manufacturing sector is having a strong run, thanks to solid demand for exports and a weaker pound, but the Bank of England may find it difficult to hike the interest rate in the near term due to the benign outlook for growth and inflation, James Smith, an economist at ING, said.

The manufacturing Purchasing Managers' Index dropped to 56.3 in December 58.2 in November, survey data from IHS Markit showed Tuesday. Any reading above 50 indicates expansion in the sector.

Despite this fall, the PMI is still riding high on the wave of stronger global growth, and to a lesser extent, the weaker pound, the economist noted.

"The manufacturing sector continues to be a clear bright spot, but it's worth remembering that it makes up a relatively small share of the overall economy," Smith pointed out.

Looking head, Smith said a pick up in consumer spending is unlikely as real wages are set to be more or less flat this year.

This will offset any further manufacturing gains and limit overall growth to around 1.4 percent in 2018, he added.

Furthermore, this will continue to make life difficult for the Bank of England, who we think have a relatively narrow window before the summer if they want to squeeze in another hike, Smith said.

"Policymakers have signaled they are inclined to increase rates again if the opportunity arises, particularly now that a transition period is likely to be agreed at some point in the first quarter," the ING economist said.

"But a benign outlook for growth and inflation means a rate hike is still far from a done deal," the economist concluded.

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