Pressure for interest rate rise mounts

Manufacturing output has hit a 10-year high, while inflationary pressures are building across the economy, according to two surveys published today as the Bank of England prepares to meet to set interest rates.

The Bank's Monetary Policy Committee is certain to leave rates on hold but analysts will be alert to any signs that its members are leaning towards the need for a rise.

The MPC was split three ways last month, with David Walton calling for a quarter-point rise and Stephen Nickell for a cut. However, Professor Nickell has now left the MPC and been replaced by David Blanchflower, who has given no indication about how he is inclined to vote.

The EEF, a manufacturing trade body, said its survey of more than 1,100 companies showed that output and orders had expanded at a "rapid" pace.

The number of firms reporting a rise in output over the latest three months exceeded those witnessing a fall by 22 per cent - the highest balance since the end of 1996.

Orders also rose, driven by a widespread surge in orders from overseas, especially the rest of the Europe. Domestic orders, however, were relatively sluggish. Firms were able to raise prices, and took on new staff for the time since the start of 2005. Investment intentions remained positive although well below the levels of the 1990s.

Stephen Radley, the EEF's chief economist, said manufacturers were making the most of the global economic boom - but he urged the MPC not to derail the recovery at UK factories with a rate rise. "In the labour market, on the high street and at the factory gates the signs of inflationary pressure are extremely limited, so any move would be premature," he said.

Asked whether a rise in UK rates or a possible half-point increase by the European Central Bank on Thursday would be more damaging for British businesses, Mr Radley said it was a "hard call". "But given that Europe is our most important export market and that its largest economy, Germany, is facing tax rises, I think a large increase in rates in the rest of the EU would probably be more damaging than a move here," he said.

In a separate report, the accountancy firm BDO Stoy Hayward said its latest trends report highlighted an upturn in economic growth on the back of increased consumer spending and a buoyant housing market.

Optimism among business rose to its highest level in the history of the survey. Its inflation index rose sharply on April's surge in oil prices to a record high. Peter Hemington, a partner at the firm, said: "The most recent available data points to a possible rate rise at some point this year."

Douglas McWilliams, the chief executive at the analysts CEBR, which worked on the survey, said: "The MPC may need to consider a rate rise later in the year in order to cool prices and keep inflation at a manageable level."

However, all 40 economists polled by Reuters before the weekend expected the MPC to leave rates on hold at 4.5 per cent for the 10th month in a row.

Many cited the 2.7 per cent rise in the pound's effective exchange rate in the month since it compiled its May forecasts, and the sharp drop in equity prices. "Both moves should dampen the committee's fear of inflation and keep [rates] on hold," John Butler, the chief UK economist at HSBC, said

Howard Archer, the chief UK economist at Global Insight, said doubts over the longer-term prospects for consumer spending in the wake of a rising tax burden, soaring utility bills, high petrol prices and rising unemployment would keep rates on hold for some time. "Furthermore there are emerging signs that the 'mini boom' in the housing market could be beginning to peter out," he said.