Strong growth dampens hopes of early UK rate cut

A cut in UK interest rates next week no longer appeared a racing certainty yesterday as new figures for January showed that the economy is enjoying strong growth across the board.

A cut in UK interest rates next week no longer appeared a racing certainty yesterday as new figures for January showed that the economy is enjoying strong growth across the board.

House prices rose at the fastest rate for six years, shoppers flocked back to the high street, and the manufacturing sector recorded its strongest growth for a year.

The contrast between US and UK outlooks helped propel the pound to its highest against the dollar in more than four months; it leapt more than two cents to $1.4823.

The argument for lower rates was further dented by a warning from a leading economic forecaster that a cut would be "unwise". The National Institute for Economic and Social Research said the economy was set for three years of above-trend growth and that rates should be held at 6 per cent.

However, it forecast that inflation would fall to 1.3 per cent next year, which would require the Bank of England to write a public letter of explanation to the Government.

The latest statistics did not paint "a picture of an economy starting a recession", the institute said. "There is certainly a case for even tighter monetary policy. It would certainly suggest it is unwise for the interest rate to be cut." Its call ran contrary to the view of the financial markets and most City economists. They expect rates to fall to 5.5 per cent by the middle of the year.

Nationwide building society said house prices rose at their fastest rate for more than six years last month. The price of the average home jumped 2.5 per cent - its strongest monthly rise since October 1994.

A survey by the Confederation of British Industry showed that retail sales rose at their fastest in eight months. Sales of furniture and carpets, which often reflect a strong housing market, did particularly well.

Alastair Eperon, the chairman of its survey panel, said the strong rise had been a rebound from a "disappointing" Christmas. "These results do not alter our view that a small cut in rates next week would not put the Government's inflation target at risk."

The British Retail Consortium said that any extra volume had been won at the expense of prices, which fell by 1.2 per cent - a deeper rate of deflation than that seen last year.

Evidence of the strength in the manufacturing sector came from an important survey that pointed to the third successive month of growth.

The Chartered Institute of Purchasing and Supply said its index of manufacturing activity rose to its highest level for a year. CIPS said a key issue was whether UK industry would be affected by the slowdown in the US. "I'm slightly surprised [by the survey]," said its spokesman Roy Ayliffe. "I think that there might be a lag effect."