DESPITE signs of an upturn in the manufacturing sector, the Bank of England's deputy governor, Mervyn King, claims it is still too early to say a full recovery from global slowdown is under way.

Speaking at the British Chambers of Commerce national conference, he said it was too soon to be confident that a recovery was "entrenched" despite encouraging signs from British industry.

His comments came on the day that the CBI released its quarterly industrial trends survey, showing business confidence in the manufacturing sector had risen for the first time in more than two years.

The sector has been rocked by the global economic slump but the CBI said the improvement in optimism indicated the "first signs of recovery from recession".

Ian McCafferty, the CBI's chief economic advisor, said: "The deepest manufacturing recession for over a decade appears to be on the turn.

"Expectations of small rises in orders and output have led to manufacturers becoming significantly more optimistic."

Mr King said that while business optimism was improving, investment had yet to pick up in either the UK or the US. He said consumption was set to decline while house price inflation was also expected to fall back.

The increase in national insurance contributions outlined in last week's budget would impact the growth in levels of real take home pay, he added.

Analysts believe interest rates will begin to creep up from the present level of four per cent as the health of the British economy improves.

Mr King said the Monetary Policy Committee (MPC) would take the path necessary to keep inflation close to its target rate of 2.5 per cent while the economy rebalances.

"The MPC will take decisions on rates one month at a time," he said.

"But what should be in no doubt is that the MPC will take whatever steps are necessary in order to keep inflation on track to meet the 2.5 per cent target."

The CBI's survey found that over the last four months employment in the manufacturing sector fell and the trend is expected to continue, adding to the 500,000 manufacturing jobs already lost over the past four years.

Firms were also continuing to cut prices and costs to hang on to customers.

Business optimism came in at plus 21, the first positive balance since January 2000. In October, rocked by the effects of September 11, the balance sank to minus 54.