City split on need for rate rise this week

Leading economists are split on the possibility of another interest rate increase this week as members of the Bank of England's Monetary Policy Committee (MPC) meet on Wednesday and Thursday.

Some City economists hold firm to their view that the cost of borrowing needs to increase again. In a paper published this morning, Michael Dicks of Lehman Brothers argues that more weight should be placed on indicators of inflationary pressure such as higher earnings growth than on signs of weakness in manufacturing, like the latest CBI surveys.

Mr Dicks says: "Certainly the call is a close one. But if rates are not raised, then it will require some awfully good news on the inflation front to prevent a hike later in the year."

The Bank's "Inflation Report" this month was likely to have to show a higher forecast for inflation than its prediction in November because of higher-than-expected figures in the meantime, he said.

On the other hand, the "shadow MPC" today advises the real thing to leave rates unchanged, although on a split vote.

This group - consisting of nine monetarist economists such as Sir Alan Walters, once adviser to Margaret Thatcher, Professor Patrick Minford, and Professor Peter Spencer of Birkbeck College - concluded that the recent figures failed to give a consistent picture of where the economy was heading. The uncertainty swung the vote in favour of inaction.

A survey of small and medium-sized businesses in manufacturing, published this morning by the Confederation of British Industry and chartered accountants Pannell Kerr Foster, confirmed the subdued outlook in manufacturing. Business confidence fell to a five-year low, with export optimism down for the fifth time running.