Interest rate rises urged to cool gathering boom in London's buoyant economy

The Bank of England must not delay the rises in interest rates that will be needed to keep inflation under control, a senior Greater London Authority economist said yesterday.

The capital is heading for a year of "healthy growth" buoyed up by a robust performance for the British and world economies, Duncan Melville said. "The latest indicators suggest growth is rising across all three and that the prospects are for growth to continue. Growth in international economies benefits London, where many firms are more exposed to international markets than in other parts of the country."

The latest monthly report on the capital's economy showed that the number of bus and Tube passengers had hit a nine-year high, tourism remained strong, despite the slump in the dollar, optimism is rising among business managers and confidence among manufacturers at its highest since 1997.

Mr Melville, who stressed he was not speaking for the GLA or Ken Livingstone, the Mayor of London, said it was better for interest rates to rise now to maintain economic stability and low inflation. "If no action is taken and higher inflation starts to take hold, interest rates are likely to rise to an even higher level in order to reduce inflation. This would generate higher economic costs in terms of lower output and employment," he said, adding that even if rates rose by a half point to 4.5 per cent, as the financial markets predict, this would still be low by historical standards. Rates peaked at 15 per cent in 1990.

Stocks surged in London yesterday amid optimism over the UK economy. The FTSE 100 hit a 19-month high before falling back into negative territory while the FTSE 250 index of mid-sized companies surged to a two-year closing high.

"There has been a sea change in sentiment in the course of just the last couple of sessions," said Jeremy Batstone, head of investment strategy at Fyshe Group. He said he was forecasting the FTSE 100 to end the year at 4,850, a gain of more than 8 per cent. "The UK is forecast to grow reasonably strongly this year so mid-cap stocks look good play," he said.

Mr Batstone warned that the weakness of the dollar, which would harm earnings for the multinationals in the FTSE 100, and rising interest rates, could put a brake on the rise.

Market watchers said some of the FTSE's buoyancy came from relief that Standard Life, Europe's largest insurer, had successfully completed its sale of £7.5bn of equities without disrupting the overall market.