Strong figures make City nervous ahead of MPC meeting

A batch of economic figures released yesterday has heightened City jitters ahead of Thursday's Bank of England interest rate announcement. Lea Paterson asks whether yet another rate hike is on the cards.

New data suggests that consumers are hitting the high street, houses prices are up and companies are starting to struggle to meet demand. Consumer credit jumped by pounds 901m in October, according to the Bank of England, the latest Purchasing Managers' Index (PMI) shows that growth in the UK's manufacturing sector has hit a seven-month high and Halifax says house prices rose by 0.9 per cent in November.

Edmund Nonis, economist at Nikko Europe, said the figures would "create a lot of nervousness in the market" ahead of this week's meeting of the Monetary Policy Committee.

Most City commentators are predicting that the Bank of England will keep interest rates unchanged on Thursday and are anticipating further rate hikes after the new year. But, after last month's surprise rate rise, the markets are becoming nervous in the run-up to the Bank's announcement. Ian Stewart, economist at Merrill Lynch, said: "I think it [an interest rate rise] is unlikely but it can't be wholly ruled out."

Recent indications have been that the overheating UK economy, following five rate rises since May, could be finally beginning to cool. But figures released yesterday suggest that underlying economic growth is still very strong. "Overall, the numbers were slightly stronger than expected," admitted Mr Stewart of Merrill Lynch.

Economists were particularly concerned yesterday at lengthening delivery times, which grew last month at their fastest rate since June 1995. Increasing delivery times are regarded as evidence that companies are struggling to meet consumer demand and that inflationary pressure is starting to build. Mr Stewart said: "It does seem as if bottlenecks are beginning to build."

As well as the PMI and the consumer credit figures, yesterday also saw the publication of provisional November figures for M0, a narrow measure of money supply. M0 grew by 1 per cent in November, slightly ahead of expectations, and has risen by 6.8 per cent in the year.But the jump in M0 was exaggerated by the introduction of the new 50p coin, the Bank of England said. According to Salomon Smith Barney: "Excluding the new 50p coin, the previous slowing trend in the growth of notes and coin [one of the principal constituents of M0] would have continued."

The growth in the manufacturing sector last month was largely due to buoyant domestic demand, according to the Chartered Institute of Purchasing and Supply (Cips), which publishes the PMI. Cips said: "Demand was once more principally driven as the strength of the pound continued to have a negative impact on domestic demand." Overall, the PMI rose to 53.9 last month, up 0.1 on October. But, despite the strong pound, new export orders grew marginally for the second month on the run, a fact which surprised some City commentators.

Windfall payments were the key driver behind yesterday's booming consumer credit figures, economists said yesterday. Net consumer credit grew by pounds 901m (1.1 per cent) in October, following a pounds 800m rise in September. This was "broadly in line with expectations", according to economists at Nikko Europe, who were more concerned with the jump in gross consumer credit to the highest level on record.

Hundreds of thousands of members of Northern Rock, the former building society, were the latest beneficiaries of the windfall payouts. In October, Northern Rock became a bank in a pounds 2bn conversion.

The latest rise in house prices, which are now 6.1 per cent higher than last year, according to the Halifax house price index, was higher than expected. The index is now at its highest point since June 1989. But Halifax said the increase was unlikely to be sustained in the coming months. It said: "The recent rises in interest rates, and slower economic growth more generally in the UK in 1998, should ensure house price inflation of around 5 per cent in 1998."

Not all of yesterday's economic data suggested inflationary pressure was building. The Bank revised its preliminary estimates of October M4 downwards, suggesting that inflationary pressure could be slightly less than first thought. But economists played down the significance of this yesterday, saying the MPC was more likely to be concerned with forward- looking signals when it begins its two-day meeting tomorrow.