City divided over prospect for summer rate rises 5.5% - but what then?

The Bank of England is widely expected to lift interest rates to 5.5 per cent today, but the City is split on whether more increases will be needed over the summer.

With inflation currently running at 3.1 per cent - more than a percentage point above the 2 per cent target - and the economy still strong, analysts are unanimous in predicting a quarter-point increase at midday. And a growing number believes today's turn of the monetary screw - the fourth such tightening since last August - will not be enough to bring inflation back to heel.

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A Reuters poll of 61 City pundits last week found 14 predicting rates will climb to 5.75 per cent or beyond later this year. Financial markets, meanwhile, already regard an increase to 5.75 per cent as odds-on.

At the hawkish end of the spectrum, Dominic White, UK economist at ABN Amro, believes rates will be at 6 per cent by the end of the year, a level not seen since February 2001. "The rate hikes already carried out have had very little impact on consumer spending or the broader economy," he said. "The inflation picture has continued to deteriorate and we believe the increase is more fundamental than rising energy prices. We are also sceptical whether it will improve noticeably over the next 12 months. All that means that the Bank will need to raise rates to 6 per cent to shock the consumer, not just in terms of house prices but also in terms of their spending."

Howard Archer, chief UK and European economist at Global Insight, expects today's move to be followed by a similar hike by August. "Back-to-back hikes in May and June are a very real possibility, particularly if inflation comes in at 3 per cent or above in April and there is ongoing evidence that firms are becoming more confident in their pricing ability and seeking to push through more price hikes," he said.

Mr Archer, while not ruling out 6 per cent rates, expects 5.75 per cent to mark the peak of the current interest rate cycle. "We believe that modestly softer growth over the coming months, only marginally higher wage increases and the strong pound will help to contain underlying inflation pressures and dilute the need for further rate hikes beyond 5.75 per cent," he said.

In the doves' camp is George Buckley, chief UK economist at Deutsche Bank, who thinks today's move will be sufficient. "We remain of the view that today's hike will be the last this cycle, particularly if households respond quickly by paring back consumption," he said. "Monetary conditions seem to have tightened more quickly than higher rates alone might have suggested on account of the strength of the currency." Sterling, while dipping back below $2, is still at its highest for 15 years.

The Bank's Monetary Policy Committee will have to grapple with a raft of economic data before making up its mind on rates today. As well as the shock rise in inflation, GDP figures showed that the economy expanded by a punchy 0.7 per cent in the first quarter. House price inflation, while down from its highs, is still in double digits.

Ahead of the decision, figures yesterday showed high-street inflation remains subdued. The British Retail Consortium's shop price index showed prices in April were just 0.8 per cent higher than a year earlier, up from 0.7 per cent in March. The inflation was entirely due to the food sector, where prices were 3.9 per cent higher as consumers traded up to premium and organic lines. Non-food prices were 0.6 per cent lower.

Move to Wales 'risks data quality'

Plans by the Office for National Statistics to move its headquarters from London to Wales are a "serious risk" to the quality of the data used when setting interest rates, the Bank of England said yesterday. In a written submission to the Treasury Select Committee, the Bank said: "If substantial numbers of ONS staff are unwilling to relocate, the loss of skilled individuals could have a severe impact on a range of statistics."

As part of Gordon Brown's plans to move civil service jobs out of London, the bulk of the ONS's Pimlico-based staff were to be relocated to Newport, South Wales. But about a third of those affected have resigned, retired early or taken redundancy. Karen Dunnell, who heads the ONS, admitted yesterday that she expects only around 15 per cent of those workers asked to move to comply.

An ONS spokesman said it was doing everything it could to minimise risk, and pointed out that retail sales, earnings and GDP data were already produced from Newport.