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By Fiona Shaikh
LONDON, Nov 2 (Reuters) - British manufacturing activity grew at its fastest rate in two years in October as new orders rose at their fastest in almost 6 years and firms started rebuilding their stocks, a survey showed on Monday. The CIPS/Markit purchasing managers index of manufacturing activity rose to 53.7 in October from an upwardly revised 49.9 in September, signalling the fastest pace of growth since November 2007 and beating forecasts for a rise to 50.0.
The improvement was driven by a surge in new orders, with the index for this measure jumping 6.8 points on the month to 59.5, the highest since January 2004, when it was 61.5.
The figures suggest Britain's economy made a strong start to the final quarter of this year, having suffered its longest recession on record.
Gilt futures fell almost 20 ticks and the pound rose almost half a cent against the dollar, as investors bet that it slightly lessened the chance of the Bank of England deciding to inject more stimulus into the economy this week.
However, analysts questioned whether the survey was a reliable gauge of what is really happening in the economy.
"It does change the balance of risks ahead of the BoE meeting, but we're still sticking with our forecast for more Quantitative Easing," said Brian Hilliard, economist at Societe Generale.
"The disappointment with Q3 GDP was more on the services side than manufacturing, so Wednesday's services PMI will be important."
The central bank will decide on Thursday whether to increase its 175 billion pound quantitative easing programme aimed at boosting the economy.
Two-thirds of economists in a Reuters poll reckon the central bank will top up the scheme after last month's official data showing the economy unexpectedly shrank in the third quarter.
DESTOCKING NEARING END
Monday's survey suggested that a long period of destocking may be nearing an end, which should pave the way for firms to ramp up production if demand holds up. This would give a boost to the economy, although manufacturing only accounts for 13 percent of Britain's economic output.
"Looking ahead, the combination of rising new orders, lean inventories, high orders-inventory ratio and weak sterling all suggest that the sector should continue its recovery," said Rob Dobson, senior economist at Markit.
Manufacturing output grew at its fastest pace since November 2007, with consumer and intermediate goods manufacturers continuing to enjoy growth, while investment goods firms reported declines.
"Companies indicated that higher levels of new business encouraged the restart of some production lines," Markit said.
"There were also reports of market conditions starting to improve, despite remaining tough overall, and clients moving closer to restocking following a sustained period of inventory depletion."
It said the domestic market was the main source of demand for new orders, but the weak pound continued to support exports.
Sterling has lost more than a quarter of its value against other currencies on a trade-weighted basis since the onset of the credit crunch two years ago, a development that BoE policymakers have said should help rebalance the economy.
But despite the improvement in demand recorded in October's survey, firms were unable to pass on higher raw materials costs to their customers.
The input prices index rose to its highest in 13 months, with the weak pound also a factor in higher raw materials costs, Markit said.
The output prices index, meanwhile, rose only modestly to stand just below the 50-level that separates contraction from expansion.
Companies cut staff for an 18th consecutive month in October, albeit at the slowest pace since June 2008. (Editing by Stephen Nisbet and Toby Chopra)