Think-tank calls for rate rise after rebound in manufacturing

An influential think-tank yesterday called on the Bank of England to raise interest rates today as official figures showed factory output is running at its highest level for almost two years.

An influential think-tank yesterday called on the Bank of England to raise interest rates today as official figures showed factory output is running at its highest level for almost two years.

In what might prove the final piece in the jigsaw for the Monetary Policy Committee, government data finally moved into line with independent surveys showing a recovery in industrial activity.

The 0.9 per cent growth in manufacturing output - the best since August 2002 - was higher than expected and followed two successive monthly falls. The National Institute for Economic and Social Research said the rebound had contributed to an acceleration in overall economic growth to 0.7 per cent for the three months to May from 0.6 per cent in the first quarter.

Martin Weale, its director, said: "In the light of the continued buoyancy, we believe the MPC should increase interest rates."

Today's decision is the most finely balanced for several years. Since November the Bank has increased rates every three months, including last month's increase to 4.25 per cent.

But it abandoned this "gradual" approach last month when it debated the merits of a half-point rise and published forecasts showing inflation shooting above the targets if rates were left unchanged.

More than half of City economists surveyed by two news agencies forecast a rise in rates today, which would be the first back-to-back monthly for more than four years.

Since May's decision, figures have pointed to another surge in house prices, record mortgage borrowing and strong retail sales.

Simon Rubinsohn, the chief economist at Gerrard, said: "Today's data will strengthen the conviction of the MPC to raise rates at its current meeting by removing one of the remaining obstacles to such a move, the very disappointing trend in official manufacturing figures."

The Office for National Statistics said the increase in factory output was across the board with strong performances from chemicals, electrical equipment and machinery.

The 2.6 per cent surge in chemicals was driven by the largest increase in pharmaceutical production since modern records began in 1960s.

Overall, industrial production, which includes mining and the public utilities rose 0.7 per cent to deliver three-monthly growth of 0.1 per cent - the first positive result for a year.

The ONS highlighted a large increase of sand and gravel quarried, which it said it could be driven by the current construction boom.

The positive tone was echoed by figures on trade in April, which showed exports of goods rose 4.5 per cent.

"If exports continue to see this sort of improvement the future for manufacturing looks bright - which is what the surveys have told us for some time," David Page, an economist at Investec, said.

Britain's deficit with the rest of the world widened to £4.7bn in April from March's £4.2bn, although this was due entirely to a £0.5bn worsening in oil trade.

Trade in crude posted a deficit of £79m, its first shortfall since 1991, although an ONS statistician said it could be revised away as have other recent deficits. Stripping out oil and other erratic items, the deficit was broadly unchanged at £4.5bn.