Further rate rise looms as demand keeps growing

Borrowers and homebuyers face another rise in interest rates after a new survey showed that home demand continued to outweigh the impact of the strong pound on industry in July.

Comments yesterday from Charles Goodhart of the Bank of England's Monetary Policy Committee, and Howard Davies, who has just left the committee, also hinted at an increase in borrowing costs. The pound returned to its highest level for more than eight years in reaction, reversing its moment of weakness earlier in the week.

In a radio interview Mr Davies said: "A modest rise in interest rates may well be needed." Professor Goodhart said the committee had to be sure that the economy had slowed to its trend rate of growth.

The rapid growth in demand was confirmed by yesterday's survey of purchasing managers in manufacturing. It showed an acceleration in industrial output last month as the buoyant home market more than compensated for a drop in export orders.

The overall index of activity was slightly lower than in June but, at 53.4, remained well above the dividing line of 50 between expansion and recession.

Peter Thomson, director general of the Chartered Institute of Purchasing and Supply, said: "Nobody could be displeased about the health of the manufacturing economy, but we need to take warning from the collapse in export orders."

The diverging trends concealed by the overall index meant analysts interpreted the survey according to their prior views. While the output component jumped sharply between June and July, with consumer goods industries reporting strongest growth, the new export orders index dropped sharply, indicating falling demand from overseas for the first time since the figures began in January 1996. Prices paid for materials also fell, reaching the lowest since the survey started in July 1991.