Pressure grows for increase in rates

Surge in price of houses and factory goods leaves Bank of England decision on a knife-edge

Pressure on the Bank of England to order a rise in interest rates tomorrow rose sharply yesterday after new figures showed a jump in house prices and in the cost of goods leaving factories.

The upbeat figures are the latest in a run of positive data that raised speculation that the Monetary Policy Committee will have to act to bring inflation under control after leaving the base rate unchanged for 11 months.

The economy is growing well above trend, at a quarterly rate of 0.8 per cent, inflation is well above its 2 per cent target and the housing market and the high street are witnessing a rebound.

On the other hand, increases in employment and unemployment and modest rises in average earnings growth show little sign of price increases feeding through to higher wages. "At last it's got interesting," said Andrew Smith, the chief economist at accountants KPMG. "A combination of above-trend growth and above-target inflation has finally given the interest rate hawks some serious ammunition."

A poll of 46 economists last week showed seven predicting a rate rise when the MPC announces its decision at noon tomorrow. While still a small number, it includes names such as Goldman Sachs, Royal Bank of Scotland and Investec.

The hawks were handed fresh ammunition by figures from Nationwide building society yesterday showing the average price of a home rose 0.8 per cent in July, an acceleration from June's 0.3 per cent. This took the annual rate of house price inflation to 5.9 per cent, compared with a 5.0 per cent annual increase in June and the highest since April 2005.

The rise followed figures from the Bank on Monday showing a sharp jump in the number of mortgage approvals for borrowers looking to buy in the coming weeks. "There is still plenty of momentum in the housing market," said Dominic Bryant, an economist at BNP Paribas. "This highlights the need for a rate hike this Thursday, given inflation is well above target and the Bank does not expect it to fall back to target if rates are left unchanged."

Others pointed out the acceleration in the annual rate was exaggerated by the downturn in the market a year ago. Kelvin Davidson, a property economist at Capital Economics, said speculation about higher rates had already pushed mortgages higher, which in turn had aggravated affordability problems for new buyers. "With affordability under unrelenting strain, we continue to expect a cooler housing market by the end of the year," he said.

Meanwhile, the price of goods leaving the factory gates rose to their highest level for two years, according to a snapshot survey of the manufacturing sector in July by the Chartered Institute of Purchasing and Supply. Its index, based on a survey of about 600 companies, rose from 54.6 in June to 56.2, its highest since December 2004 and a sign that companies are succeeding in pushing through price increases.

CIPS said this reflected a "sharp rise" in input costs and "robust demand that encouraged some manufacturers to increase their prices". Its overall index slowed between June and July as growth in output declined sharply. The two findings highlighted the dilemma facing the MPC.

Howard Archer, at Global Insight, expects no move tomorrow. He said: "With orders and employment growth both slowing, the survey adds to the suspicion that UK growth will moderate in the third quarter."

But Ross Walker at Royal Bank of Scotland said: "With various MPC members alert to rising import and production price pressures, today's survey provides another warning of the upside inflation risks."