Bank of England under pressure not to stall recovery with interest rate increase

The Bank of England Monetary Policy Committee meets this week amid growing pressure for it not to stall economic recovery with the first rise in base rate since February 2000.

Markets took heart last week when Charlie Bean, the Bank's chief economist, said it was "extraordinarily difficult" for central banks to take effective pre-emptive action against asset price bubbles such as the UK housing boom.

Consumer spending has continued to grow at a healthy pace, but the mood may be toned down this morning when Marks & Spencer unveils what is expected to be a disappointing trading update for the summer. This will have been affected mainly by the very hot weather, which depressed the sales of many clothes retailers. But that same hot weather will have been good for many areas of food and drink sales.

The number of people visiting UK stores dropped in September for a second month, said a report yesterday, suggesting consumers' spending may be slowing. Shopper numbers slipped 1.7 per cent from a year ago, according to a survey of more than 1,200 stores by Solution Products Systems, a research company whose clients include Boots the Chemist and HMV, the country's biggest seller of DVDs. "The figures suggest that some enthusiasm is disappearing out of consumer activity," said Tim Denison, an SPS director. "It might be the first indication that the rate of growth in consumer borrowing is slowing down."

The MPC and the City's army of economics analysts will also be looking out tomorrow for official data on manufacturing output for August and mortgage equity withdrawal in the April-June quarter. While these numbers will be backward-looking, they will provide solid evidence for or against anecdotal suggestions that much of the spending growth has been fuelled by equity withdrawal from houses, and that industrial production is trending upwards. That will in turn give a strong clue to the likely increase in gross domestic product in the third quarter of the year, up to last Tuesday.

For that reason the view was gaining ground in the City that while we may be spared a rate rise this week there may be an overwhelming case for an increase in November or December. The BDO Business Trends report, published today, indicates that the economy appears to be entering a sustained upturn, with UK business output expectations at their highest for more than a year. The BDO optimism index increased by 0.3 points this month to 98.7, its highest since April last year. The index implies that annualised growth in the first quarter next year will be 1.6 per cent.

Douglas McWilliams, the chief executive of the Centre for Economics and Business Research (CEBR), said the report showed improvement in output and optimism. He added: "The latest BDO 'poll of polls' confirms that, with signs of recovery in the world economy, the economic climate for UK businesses is continuing to improve." The BDO output index has risen 0.5 points to 99.7, reflecting higher exports due to weaker sterling and signs of recovery across Europe.

The CEBR and the US bank Citigroup issued bulletins at the weekend suggesting that the UK budget deficit is running far worse than the Treasury forecast, making it more likely that the Bank will have to raise rates by a significant amount in the next few months.