UK rates certain to rise after growth surge

The pound surged against the dollar yesterday after record mortgage lending, booming retail sales and a strongly recovering manufacturing sector appeared to cement the case for a rise in interest rates tomorrow.

The pound surged against the dollar yesterday after record mortgage lending, booming retail sales and a strongly recovering manufacturing sector appeared to cement the case for a rise in interest rates tomorrow.

Mortgage lending rose in March at the sharpest rate on record, while retail sales and output and inflation all soared in April, according to data published just two days ahead of the rate decision.

An overwhelming majority of City analysts believe the Bank of England will order its third quarter-point rate rise in seven months, to 4.25 per cent, when its Monetary Policy Committee begins its two-day meeting today.

"The astonishing strength of personal borrowing, mortgage commitments and house prices is a useful reminder of just how loose monetary policy is," said Michael Saunders, an economist at Citigroup who sees rates hitting 5.5 per cent next year.

Sterling jumped more than two cents to as high as $1.7937 as traders continued to firm their bets on a rate rise. A poll by Reuters showed 45 out of 46 analysts forecasting a rise.

Figures from the Bank showed mortgage lending rose by £9.3bn in March, taking the annual rate of increase to a record 15.2 per cent and suggesting the two rate rises since November have done little to curb enthusiasm for debt.

The number of new mortgage approvals held steady at 127,000, pointing to further house price rises over the summer, according to analysts.

Personal borrowing slipped slightly from February's figure, but total borrowing on credit cards in March saw the biggest rise in more than two years, showing the continued willingness of households to spend.

This was backed up by the CBI's monthly survey of retailers, which showed high street spending rebounded sharply last month after a dip in March and retailers were even more optimistic about this month.

More than half of all retailers reported sales up in April from a year earlier, outnumbering those reporting a fall by 30 per cent, up from 17 per cent in March. A balance of 34 per cent expected a further rise in May.

The CBI, the country's largest employers' organisation, gave the green light to a rate hike, saying monetary policy would have to return to a "more neutral level".

But John Longworth, the head of the CBI's survey panel, added: "The Bank must be careful not to stifle the economic recovery by abandoning its well-signalled, gradualist approach to rate rises."

However a separate survey by the British Retail Consortium said there was little sign of inflation on the high street, with prices falling 0.7 per cent last month. "There is no justification for a rate rise," said Kevin Hawkins, its director general.

There was further pressure for a rate rise from a manufacturing survey showing factories imposed their biggest price rise last month since at least 1999.