View from City Road: Stronger case for early rate rise

The CBI seems relaxed enough about the implications of its latest industrial trends survey but the Bank of England, in its new-found role as guardian of Britain's anti-inflation regime, has every reason to be concerned. The Governor told the Chancellor of the Exchequer in June that the survey's measure of price expectations would have to be watched closely over the next couple of months for signs of inflation. Since then the number of manufacturers expecting to raise prices has jumped sharply.

So far, manufacturers have had difficulty converting their desire for price increases into concrete results, but with demand and orders strengthening, the point at which their wishes may be fulfilled is fast approaching. The survey contains several signs that the economy's recovery is sufficiently well entrenched to put upward pressure on inflation, although the CBI argues that at least three months should pass before a rise in interest rates is considered.

Similar signals are emerging throughout the economy. For example, the latest MSL index shows that the recruitment of senior executives is 24 per cent up on the same period last year. The euphoria of the 1980s has yet to return, but even so recruitment is busier now than at any time since mid-1991.

At the top end of the recruitment business, Rowena Parsons, head of research at Korn Ferry Carre Orban, says growing optimism is causing employers to replace some of the middle managers culled in recent years. 'When you stop cutting you start putting on weight - it's like stopping a diet,' said Ms Parsons, adding that once the climate improves it is easy for department heads to argue they can do better with more people.

Growing numbers of companies are telling the CBI that shortages of skilled and other labour are limiting their ability to step up production. It remains to be seen how easy it is for companies to boost capacity with new recruitment and capital investment, but it will certainly be easier if recovery is steady rather than spectacular.

All of which suggests the Governor is right to be thinking of a pre-emptive rise in interest rates in the next few months. It hardly seems likely he will press the case at his meeting with the Chancellor tomorrow, but an upward move is becoming increasingly likely this side of the Budget.