Rates held as growth continues

The Chancellor appears to have decided against raising interest rates this month, it emerged yesterday morning, as fresh figures on industrial output and high street sales showed the economy growing at a steady pace.

There was further backing for Mr Clarke's apparent decision in a new forecast from the London Business School today. It predicts a further pick-up in growth this year despite the strength of the pound, but said the currency would help keep inflation below target.

But the favourable state of the economy will not necessarily help the Government win the election, according to an analysis in the new report. It concludes the Conservatives cashed in their reputation for good management of the economy to win the 1992 election, and have not yet restored their credibility. The longer Mr Major can delay the election, the better his chances will be, according to economist Simon Price.

Industrial output increased by 0.6 per cent in December, while its manufacturing component climbed 0.2 per cent. With data for October and November revised up, total production rose by 0.9 per cent in the final quarter of last year to a level nearly 2 per cent up on a year earlier.

The figures showed that manufacturing remained on a gentle upward path despite the strong pound. There were drops in engineering and textiles output during the month. Chemicals showed the biggest gain.

Outside manufacturing, there were sharp increases in both electricity, gas and water, due to the bad weather, and mining and quarrying.

Separately, the Confederation of British Industry reported retail sales volumes had picked up in the year to January. According to its distributive trades survey, the balance reporting higher rather than lower sales was 36 per cent, up compared with December and January 1996, but weaker than the summer.

Alastair Eperon, chairman of the survey panel, said: "Retailers did better in terms of January's sales growth than they had expected as consumers were confident enough to step up their spending. However, the rate of underlying sales growth eased for the second consecutive month, although the increase in trade remains robust."

Analysts now believe base rates will stay at their current level of 6 per cent until after the general election. "The softness of the December data generally has clearly given Mr Clarke a window of opportunity to avoid raising base rates this month and a move ahead of the election now seems highly unlikely," said Adam Cole, UK economist at James Capel.

But opinions about whether this is the right policy are divided in the City. Mr Cole said: "This is a policy error in the making." The economy would grow fast enough this year to force post-election rate increases, he predicted.