MPC facing split over when to raise rates

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The Independent Online
THE MONETARY Policy Committee is expected to be split over whether or not to raise interest rates after its meeting ends today. While inflation is still falling, faster growth and a boom in the housing market are pointing to faster price rises in future.

The Bank's last inflation forecast in May assumed house prices would be climbing at 4 per cent a year, the same as pay. Latest figures from Halifax show they are up 8.2 per cent on a year ago, and this will be incorporated in the Bank's August inflation forecast, published next week.

While the next rise in interest rates might be closer than many City pundits assume, it is bound to be controversial. The target measure of inflation is expected to decline during the next few months

A new survey yesterday showed prices falling even though both the services and retail sectors are growing at the fastest rate for more than a year.

Most economists said rates were unlikely to go up today or even by the end of the year, and were baffled that the financial markets had priced in rises of 2.25 per cent by the end of next year. "We don't think the Bank should be hiking rates," said Neil Parker of Royal Bank of Scotland. "The markets have got it completely wrong and economists can give themselves a pat on the back for calling it right."

The services sector grew at its fastest rate last month since April 1998, according to a report published yesterday. Business activity jumped to 58.0 from 56.6 in the previous month and the highest since April 1998 on an index where a number over 50 means expansion. But the survey, from the Chartered Institute of Purchasing and Supply (CIPS), also showed firms were forced to cut prices, fuelling hopes the sector has achieved high growth without any inflationary pressures.

CIPS said the growth rate for services had now accelerated for the fourth successive month. In a clear signal that more growth is in store, the index of new business rose to its highest level since May 1997.

The report highlighted dangers the sector may be overheating with pressure on recruitment and wages. One in five firms took on extra staff while payroll costs continued to drive total average costs upwards. "Many panel members reported that they found it difficult to meet the higher levels of demand," the survey said.

The distributive trades survey from the Confederation of British Industry showed retail sales in July rose at their fastest rate for 18 months.

It showed 50 per cent of retailers reported sales rose last month. Just 22 per cent reported sales were falling, giving a positive balance of 28 per cent, up from 22 per cent in June and 11 per cent in May. "The survey provides more good news for the economy and confirms that the recent series of interest-rate cuts acted as a spur to encourage consumers to spend," said Alastair Eperon, chairman of the survey panel.

Sterling rose to a 12-week high against the dollar, rising to $1.6263 from $1.6225.

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