Rise in factory output adds to case for increase in interest rates

Factories are running at their fastest pace in seven years, according to figures that provide the final piece of evidence to justify a rise in interest rates this week.

Factories are running at their fastest pace in seven years, according to figures that provide the final piece of evidence to justify a rise in interest rates this week.

Activity in the manufacturing sector rose in October, the strongest figure in almost four years as output grew at its fastest pace since 1996, according to a survey of factory managers.

There was a similar rebound in the United States and Europe, which prompted a surge in stock markets around the world as well as a surge in the dollar on hopes of a synchronised global economic recovery. The Chartered Institute of Purchasing and Supply (Cips), which polled 620 British companies, said its headline index rose for the fourth month to its highest level since December 1999.

It said there had been "significant expansion" in output and new orders at home and abroad. "There were also reports that clients were beginning to rebuild inventories as confidence was recovering," Cips said.

Prices charged by firms rose for the first time in five months, although not as fast as the rise in input costs, pointing to tight profit margins.

The tone of the report added to growing consensus in the City that the MPC will raise rates when it meets tomorrow and Thursday. "Improvement in manufacturing will make the rate rise easier to justify and prevent adverse comments from the industrial lobby," said Neil Parker, an economist at Royal Bank of Scotland.

Meanwhile the Confederation of British Industry said retail sales increased at their fastest pace in 18 months in October. The data follow a run of figures showing that house prices are soaring, consumer are borrowing record amounts, service firms are growing while overall economic growth was much stronger this year than previously thought.

"It's rare to get a period when all the signs are pointing so solidly in one direction," said Adam Law, a UK economist at Barclays Capital, adding that yesterday's data "cemented" a hike. But Sushil Wadhwani, a former MPC member, said he would vote against a cut, warning a rise might push up the value of the pound and hurt exporters.

In London, the FTSE 100 closed up 45 points, or 1 per cent, at 4,332. The market was boosted by a surge on Wall Street as traders hailed upbeat numbers on the US economy. The Dow Jones rose as much as 100 points after the ISM report showed manufacturing activity grew in October at the fastest rate since January 2000.

Meanwhile construction spending hit record highs in September, suggesting third-quarter growth, which is already estimated to be the strongest for 19 years, could be revised even higher.