Bank warns of inflation rise

THE BANK of England will warn this week that rapid economic growth, shrinking industrial capacity and rising pay settlements all pose a threat to Kenneth Clarke's inflation target, although there is no sign yet of an imminent flare-up in the rate of price increases.

A small minority of City economists believe the Bank's Governor, Eddie George, will demand an immediate interest rate rise when he sees the Chancellor for their regular monthly meeting on Wednesday. Several analysts believe Mr George should ask for a rate increase, but that he will fail to bite the bullet.

'The signs of inflationary pressure highlighted by the Governor in the September monetary meeting have become more substantial,' said James Barty at Morgan Grenfell. 'We believe the Governor is likely to push for a further rise in rates at this week's monetary meeting. . . Once again, we believe the Chancellor will have little option but to accede to any such request.'

Mr Barty expects base rates to rise by a quarter-point, to 6 per cent.

David Walton, at Goldman Sachs, said there was 'a 50-50 chance' that the meeting would agree a rate increase. He added that there was a strong argument for an early rate increase if the authorities were serious about keeping a lid on inflation: 'Business confidence was not dented by September's increase, which suggests national output growth is not going to weaken.'

The CBI's quarterly industrial trends survey last week showed business optimism improving, output growing and prices and costs rising at their fastest rate since 1991. The purchasing managers' index from the Chartered Institute of Purchasing and Supply will suggest tomorrow that manufacturers are still under pressure from rising raw material prices.

Kevin Gardiner of Morgan Stanley said it would be a very close call whether interest rates went up this week. He said that the deceleration in economic growth in the third quarter was 'not a meaningful slowdown' and that it was clear that wage settlements were slowly drifting upwards.

Most analysts have become less nervous about an early rate increase since Mr George said last week that the financial markets were 'exaggerating the inflationary dangers and the extent of the rise in interest rates that might ultimately prove to be necessary to contain them'. But other economists took this as a sign that the Governor would prefer another small rate rise soon to a larger rate rise later.

Gary Marsh, economist at the Halifax Building Society, said there was no need for the base-rate rise in September, and even less need now. 'If anything it has slowed the housing market down. Estate agents say people have noticed the difference,' he said.

Mr Marsh added that the Halifax was unlikely to raise mortgage rates immediately if base rates went up again. It would wait instead until what was happening in the retail savings market became clear.

(Graph omitted)

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