MPC likely to shun early rate increase

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The Independent Online
GROWING FEARS of a repeat of a 1980s-style boom have hardened views in the City that the Bank of England will raise interest rates before the year is out to nip inflation in the bud.

The Monetary Policy Committee (MPC) is almost certain to keep rates at 5 per cent after its monthly two-day meeting, which begins today. But more than half of economists polled yesterday said rates would rise in coming months; of 15 analysts polled, eight predicted a rise and seven forecast no change.

Only two months ago the debate was about the need for another cut. Since then growth has been revised up, unemployment has fallen further and house- price inflation has surged to almost 10 per cent. Recent surveys of manufacturing, services and construction have pointed to rises in input inflation after years of falling prices.

HSBC has pencilled in a rate rise of 100 basis points to 6 per cent by March 2000 - exactly in line with the money markets - with the first rise in November. Economist Adam Cole said: "The recovery is gathering pace. The case for the Bank raising rates this year is growing."

David Owen of Dresdner Kleinwort Benson said: "Further evidence ... that inflation is coming in above expectations could be sufficient grounds for a rate rise in October."

The retail sector today made a last-ditch plea to keep rates on hold, saying its latest survey showed that growth was "subdued". Growth in sales on the high street slowed for the second successive month in August, the British Retail Consortium (BRC) said.

Total sales rose by 3.7 per cent, down on July's 3.9 per cent and 4.5 per cent in June. Bridget Rosewell, the BRC's chief economic adviser, said the increase in volume had only been achieved through price cutting. "There is no justification for interest-rate rises and further cuts would be required to generate anything like a boom," she said.

Official figures today are expected to confirm the embryonic recovery in the manufacturing sector. Manufacturing input is forecast to rise by 0.3 per cent in July following June's 0.2 per cent fall, while industrial production should have expanded by 0.2 per cent, up on June's 0.1 per cent.

t The MPC's remit should be widened to include a goal of creating employment, the UK's largest manufacturing union said yesterday. A poll of 150 full- time AEEU negotiators found that 77 per cent believed the remit should be changed, while nine out of 10 called for the committee to be more representative of manufacturing.

The survey found overwhelming support for the decision to hand the power to set interest rates to the Bank of England. Sir Ken Jackson, AEEU general secretary, said: "The MPC is steering a steady course and it is making manufacturing more confident."