Rate rises 'likely' as manufacturing grows, say analysts

The Bank of England is set to order back-to-back interest rate rises over the coming weeks, analysts said yesterday after new figures showed manufacturing growing at its fastest pace for a decade.

The Bank of England is set to order back-to-back interest rate rises over the coming weeks, analysts said yesterday after new figures showed manufacturing growing at its fastest pace for a decade.

A closely watched survey of managers showed activity in the industrial sector rose at the fastest pace since October 1994 - although manufacturing now makes up less of the whole economy than it did a decade ago.

The Chartered Institute of Purchasing and Supply (Cips) said the rebound was broad-based, with faster growth both home and overseas shared by consumer, capital and intermediate goods makers.

It is the latest economic news to point to an economy rapidly running out of spare capacity to meet demand without sparking inflation.

Economic growth is above trend, mortgage borrowing is at record levels, house prices are rising by 20 per cent a year, and retail sales are growing at the fastest pace for two years. The strength has led to calls for a half-point rate rise on Thursday - a view strongly resisted by business leaders and largely discounted by analysts.

Roy Ayliffe, at Cips, said firms were expecting a quarter-point rate increasethis month or next. "I think the sector is expecting they will go up by a half-point over the next few months and hoping for no more than that," he said. "If they go for a half-point this week that would be very worrying for them because they would fear there's a lot more to come."

A recent poll of 45 City analysts found all but one forecast a quarter-point rise this week, with the lone dissenter predicting no change. "We expect a quarter-point interest rate rise this week," Howard Archer, a UK economist at Global Insight, said. "A further quarter-point rise in September is highly likely unless there is clear evidence of a slowdown in retail sales, consumer borrowing and house prices over the next month."

Ciaran Barr, the chief UK economist at Deutsche Bank, said there was a "good possibility" the Monetary Policy Committee would discuss a half-point rise when it starts its meeting tomorrow. "Any discussion of a half-point would significantly raise the chances of another quarter-point move in September," he said.

The MPC will receive the latest inflation forecasts before their publication next week, in time for this week's meeting.

The May inflation report showed the Bank forecasting inflation would miss its 2.0 per cent, even after the previous week's rate rise - a clear signal it was planning another increase in the following month. This month's report will be the first to place more emphasis on the forecast for inflation based on market interest rates - which have rates at 5.25 per cent by the end of the year - rather than assuming unchanged rates.