Prices rising, but CBI pleads for pegged rates
The CBI's quarterly survey will weigh heavily on the minds of the Chancellor and the Governor of the Bank of England when they meet to discuss interest rates next week.
They will also discuss the Bank's latest inflation forecast, due next Tuesday, which will reflect the fact that recovery has slowed in the third quarter but is still exceeding its long-term trend. Some City economists said the meeting could agree an immediate rise in rates.
The survey showed manufacturers' costs being pushed higher by raw material prices, but companies increasingly finding themselves able to pass cost increases on to customers.
The number of firms planning to invest in new capital equipment rose to a five-year high as the number working at full capacity climbed further above its long-term average.
But the CBI maintained that the survey results 'do bode well for future inflationary pressures', arguing that a rise in the number of firms reporting price increases was normal for the time of year. Andrew Buxton, chairman of the CBI's economic affairs committee, said there was a risk of another interest rate rise but added: 'We don't think the facts are there to justify the risk.'
CBI economists said they were particularly encouraged by the strength of export orders and the fact that manufacturers were planning the biggest increase in investment for six years. Business optimism is also improving faster.
The survey prompted little reaction from the financial markets, with interest rate forecasts becoming only slightly more pessimistic in the short-sterling futures market.
The FT-SE index closed off its lows, down 28.2 at 3,000.9. The dollar dropped to a post- war low against the yen and a two-year low against the mark.
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