Industry leaders resigned to rate rise after surge in activity

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The Independent Online

Industry leaders said yesterday they were resigned to a rise in interest rates tomorrow as a new survey showed the largest increase in factory activity for eight years.

Industry leaders said yesterday they were resigned to a rise in interest rates tomorrow as a new survey showed the largest increase in factory activity for eight years.

The EEF, an employers' group, said manufacturers had finally reversed their strategy of cutting back on both investment and employment for the first time since late 1996.

Its upbeat survey for the second quarter came as Halifax reported annual house price inflation broke through the 20 per cent barrier for the first time in a year last month. "We would not welcome a quarter-point increase but we could understand it," Ian Peters, the EEF's external affairs director, said.

If the Bank of England raises rates tomorrow it would mark the first back-to-back monthly rises for more than four years at the peak of the stock market bubble. The survey showed companies' optimism remained strong despite heavy hints from the Bank that it might have to speed up plans to raise rates to counter the strength of the consumer economy.

Steve Radley, the EEF's chief economist, said the Bank should be praised for being transparent in signalling its intention to raise rates and giving firms time to prepare for higher borrowing costs. "It is better to have a small rise sooner rather than large rises late on," he said. "Those gradual movements are the right way forward." He said the Bank's signals meant an increase was unlikely to trigger a rise in the pound - a traditional fear of industry. "That factor should not be a worry," he said.

The survey's main finding was that the number of firms reporting an increase in output outnumbered those reporting falls by 17 per cent - up from 14 per cent in the first quarter. Orders also accelerated at a similar pace. But this contrasted starkly with official government figures showing that output fell 0.5 per cent in the first quarter of the year.

The EEF said the divergence in views would add to the problems that faced the Bank's Monetary Policy Committee that begins its two-day meeting today. It called for a top-level inquiry into the performance of the Office for National Statistics, a government agency. "The ONS needs to look very closely at the basis for these figures," Mr Peters said. "There is a need for an inquiry. We should look for answers and that is not satisfactory it may be necessary to look for an outside inquiry."

But he acknowledged one explanation could be a small number of firms reporting large falls in output, which would be hidden by the EEF's overall balance of opinion but would heavily influence the ONS survey. Len Cook, the chief statistician, defended the ONS, saying that it measures actual turnover rather than managers' opinions.

Meanwhile Halifax said the average price of a house jumped 2.2 per cent between April and May, taking the annual rate above 20 per cent for the first time in a year. Halifax said strong demand combined with shortages of properties for sale had driven up prices. But it continued to insist the market would slow as rising interest rates and spiralling prices kept new buyers out of the market.

Martin Ellis, its chief economist, said: "Higher interest rates and the increasing difficulties that face aspiring first-time buyers should exert downward pressure on house price inflation later in the year and into 2005." The Halifax figures echo those from the Nationwide and estate agents' surveys and follow figures from the lending industry showing that mortgage borrowing is growing at a record pace.

Sabina Kalyan, a property economist at Capital Economics, said: "Given the momentum in the market, it could be some months before rising interest rates filter through into hard data, raising the pressure on the Bank to increase the pace of monetary tightening."

The MPC raised rates in May. But the hawkish tone of the minutes of that meeting and of the inflation report have fuelled speculation the Bank could act sooner than had been expected. "A rise either this month or next is a done deal," said Andrew Smith, the chief economist at the accountants KPMG. "The Bank cannot risk leaving rates on hold until August."

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