Surge in housing and manufacturing may raise rates

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The Independent Online

The housing market and the manufacturing sector have both seen a strong upturn in activity, according to surveys published today ahead of Thursday's decision on interest rates by the Bank of England.

House prices enjoyed their strongest rise for two years last month, while factory bosses have reported a "sharp" increase in both confidence and performance. The price of the average home rose by 0.6 per cent on the back of a strong rise in London, according to the property data company Hometrack.

London was the engine for growth, posting a 1.2 per cent monthly increase while regions outside the south have risen just 0.5 per cent in the last three months.

"These results show a clear and ongoing north-south divide in the performance of the housing market," said Richard Donnell, Hometrack's director of research. "The outlook for house price growth over 2006 is dependent upon whether recent levels of price growth in the London market can be sustained."

Hometrack said demand had surged by 50 per cent in London over the past three months, while homes for sale grew by just 14 per cent. It said the national price increase was driven by rises in just over a third of postcodes. Mr Donnell said it was an early sign that activity might slow in the run-up to the summer.

Meanwhile the Institute of Directors said manufacturers enjoyed an upturn in performance over the latest quarter. The balance of directors reporting an upturn rose to 79 per cent from 60 per cent in the winter survey. The balance on optimism also rose sharply to 34 per cent from 5 per cent. ndices on investment, profits, prices charged and capacity utilisation also rose.

Graeme Leach, its chief economist, said: "We recognise there have been false dawns before, but the good news is that confidence and performance have surged together and this hasn't happened over recent years.

The Monetary Policy Committee is certain to leave rates at 4.5 per cent this week but opinion is swinging towards a hike being the next move.

Ben Broadbent, UK economist at Goldman Sachs, said: "We continue to think the next move in rates will be up and would not discount the chances of a minority vote for a hike - or at least the case for one appearing in the MPC minutes - over the next three months."

Money markets are pricing in a hike this year and last week the National Institute of Economic and Social Research urged the Bank to raise rates in a pre-emptive move to curb inflation.

The MPC is one member short following the departure of Richard Lambert to take the top job at the Confederation of British Industry. Analysts expect Stephen Nickell to use his last meeting to vote for a cut, leaving a 7-1 vote.