Industry calls for halt to further interest rate rises

Quarter-point increase to 4.75% provokes backlash * Bank sees signs of cooling in housing market
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The Bank of England faced a backlash from businesses and estate agents as it ordered its fifth rise in interest rates in 10 months yesterday, just hours after official figures showed an unexpected slump in manufacturing output.

The Monetary Policy Com-mittee increased the base rate by a quarter-point to 4.75 per cent, citing "robust growth" and continuing signs of business expansion. However, it said there were signs the housing market and consumer spending were starting to cool - a possible sign the MPC will pause before raising rates again.

The decision came as a relief after speculation it would order a half-point rise for the first time in its history to tackle the housing market boom.

Business leaders urged the Bank to think carefully before ordering another "potentially dangerous" rise. Kevin Hawkins, the head of the British Retail Consortium, said the rate hike was a mistake. "The MPC should have adopted a wait-and-see attitude," he said.

Martin Temple, the director general of EEF, the manufacturing group, said: "Three rises in four months should now be enough to keep the lid on inflation. Manufacturers will now expect a pause for breath to assess the impact of the recent rises at a time when they are faced with rising costs for energy and other raw materials."

His comments came as official figures showed factory output suffered an unexpected 0.7 per cent fall in June, the sharpest drop since October 2002.

It confounded City forecasts of a 0.1 per cent rise and came just a week after a survey from the CBI, the employers' group, showed factory output had hit its strongest level for a decade.

But Martin Weale, the director of the National Institute of Economic and Social Research think-tank, said: "Rates should have been increased more sharply already and today's increase was too small."

Analysts dissected the Bank's statements for clues about the need for - or the timing of - the next rate rise.

"Output growth has been robust and business surveys point to continued expansion," the Bank said after its rate decision. "Although the housing market remains buoyant, there are now signs that it is starting to ease, and the growth of consumption may be moderating."

James Knightley, an economist at ING Financial Markets, said: "The softer language in the statement suggests expectations of another rate hike in September may be scaled back."

A poll of 32 City economists by Reuters found 14 thought the Bank would wait until November before moving again. Seven said the next rise would come in September and six plumped for October. Phil Shaw, the chief economist at Investec, said: "There is a real possibility of a repeat of May and June when the MPC felt the need to lift borrowing costs in successive months."

There was further sign of inflationary pressure from the labour market, according to a survey showing skills shortages were pushing up pay. Demand for staff rose sharply last month driving up salaries for the 12th month in a row, the Recruitment and Employment Confederation said. "With suitable skilled candidates in short supply, firms were again willing to offer substantially higher pay rates to attract the right staff," said Brett Walsh, of accountants Deloitte & Touche, which sponsored the survey.

The Chartered Institute of Personnel and Development warned that workers would demand higher pay rises to offset the higher cost of borrowing.

The markets will now focus on next week's quarterly inflation forecasts. Analysts said if the report showed inflation surging above the 2 per cent target in two years' time despite yesterday's rate rise, it would be a signal the next increase could come as soon as next month.