Bank warns rate must rise

Interest rates will have to rise if the Government wants to hit its inflation target, the Bank of England told the Chancellor, Kenneth Clarke, yesterday - and the sooner the better.

The Bank's starkest warning yet about the need to raise the cost of borrowing as the economy forges ahead came as a blow to Tory hopes of the return of the "feelgood factor" with a further interest-rate cut ahead of the election.

Ministers hailed an ICM poll narrowing the gap between Labour and the Tories as evidence of political revival fuelled by economic recovery. But Labour said the poll, in the Guardian, showed Labour's support steady at 45 per cent - enough for a landslide victory.

Chief economist Mervyn King made the Bank's views plain: "The question will be when to raise interest rates." Although inflation is likely to fall from its current 2.8 per cent in the short term, he said it would be preferable to raise base rates sooner rather than later. "The longer we leave it, the further they will have to move."

The Bank's quarterly inflation report yesterday predicted that with no change in policy there is a worse-than-evens chance of inflation staying below its 2.5 per cent target in two years' time. It also warned that the Government was running too big a budget deficit. It said high borrowing requirements "cannot be reconciled with hitting the inflation target as well as maintaining a sustainable fiscal position".

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