Factory surge makes rise in interest rates a 'real threat'

An increase in interest rates this week is a "very real threat" after a snapshot survey of British manufacturers showed an unexpected surge in business last month, analysts said.

Manufacturing output jumped to its highest level for more than two years in September, according to a poll of more than 600 factory managers. The volume of new orders accelerated as a fall in sales abroad in August reversed direction, while firms managed to raise their prices for the 14th month running.

The headline index of activity produced by the Chartered Institute of Purchasing and Supply (Cips) rose to 54.4 in September from 53.0 in August on a scale where a number above 50 denotes expansion. Output jumped to 58.7 from 54.2, making it the fastest growth since 2004, while new orders and exports also posted robust increases.

"These data all suggest that the threat of another rate hike this week is very real," said James Knightley, UK economist at ING Financial Markets.

He said a slight drop in the index for the rise in prices charged - from 55.3 to 55.2 - would provide only "very modest comfort" for opponents of another rate rise. "We would not be surprised to see the Bank move this week rather than November."

Most City economists believe the Bank's Monetary Policy Committee will raise rates to 5.0 per cent in November, a month that coincides with its quarterly upgrade to its inflation forecasts. However, analysts are becoming nervous about the prospect of a rate rise on Thursday, especially in the wake of the increase in August which few of them had expected. "A move this Thursday cannot be ruled out," Howard Archer, at Global Insight consultants, said.

Some said they believed that the MPC would look through the data to forecasts of a US-led slowdown and a decline in inflation in the wake of the 20 per cent fall in oil prices.

"British industry is unlikely to sustain this recovery in the face of cooling global demand," said Ross Walker, UK economist at Royal Bank of Scotland. John Butler at HSBC added: "The problem for the MPC is that the longer they pause [in raising rates] the harder it may get to justify."

There was fresh ammunition for rate "doves" from a survey of the financial services sector that showed a fall in confidence and a sharp drop in employment. The past three months saw firms' income fall for the first time in two years, profitability growth flatten, while plans for recruitment and investment were cut, the CBI said.