British manufacturing at near 2-year high in June -PMI

LONDON, July 3 (Reuters) British manufacturing activity grew at its fastest pace in almost two years in June, buoyed by a pick-up in domestic demand which helped boost new orders and output, a survey showed on Monday.

The Chartered Institute of Purchasing and Supply/RBS Purchasing Managers' Index (PMI) also showed firms' raw material costs rose at their sharpest pace in 17 months, but robust demand encouraged firms to raise prices to recoup some of their increased costs.

The main activity index jumped last month to 55.1, the highest reading since July 2004 and well above analysts' expectations for a reading of 53.2.

That compared with May's upwardly revised 53.5 and left the index above the 50.0 level separating expansion from contraction for the 11th straight month.

The PMI data corroborated a survey by the Confederation of British Industry last month which showed manufacturers were at their most upbeat in a year and are likely to reinforce expectations that the next move in British borrowing costs will be up.

''The data are by no means pivotal to the (Bank of England) Monetary Policy Committee's thinking on rates but do add to a growing sense that economic activity is in fine fettle,'' said RBS Group Chief Economist Andrew McLaughlin.

''This does not amount to a rate hike but it all guarantees a hold/hike bias this summer.'' The Bank of England holds its next policy meeting on Thursday, but all 47 economists polled by Reuters predict it will leave interest rates steady at 4.5 percent.

Manufacturing production increased at its fastest rate for almost two years in June, with the output index rising to 58.8, its highest since July 2004, from 56.4 in May.

The new orders index also hit its highest since July 2004, rising to 57.7 last month from 55.8 in May, thanks mainly to increased demand on the domestic market. Export order growth eased slightly to 53.1 from 54.5.

The report said the outlook for the trend in output in June was positive as firms' holdings of finished goods shrank at their fastest pace in over 2-1/2 years, while manufacturing added jobs, with an index reading of 50.8.

Still, energy and raw material costs continued to climb, with the input prices index up at 67.5 from 67.1, the sharpest pace of increase in 17 months.

But prices at the factory gate also rose as firms tried to cover their costs, pushing the output prices index up to 54.6, a three-month high.

REUTERS MQA GC1513