Engineering recovery adds to case for rate rise

The dilemma facing the Bank of England at this week's interest rate decision intensified today with the publication of yet another survey pointing to boom conditions in manufacturing.

The dilemma facing the Bank of England at this week's interest rate decision intensified today with the publication of yet another survey pointing to boom conditions in manufacturing.

The EEF, the engineering trade body, revealed a surge in activity over the latest quarter in stark contrast to official figures showing the sector is on the brink of recession.

The bullish EEF survey follows a run of reports from the Confederation of British Industry, the British Chambers of Commerce and the Chartered Institute of Purchasing and Supply all indicating a strong revival in output and orders.

This runs counter to data from the Office for National Statistics showing that manufacturing has stagnated or fallen every month so far this year.

This contributed to an unexpectedly weak reading for overall economic growth of just 0.6 per cent in the first quarter

The Bank has already sent strong signals it is prepared to ignore the figures from the ONS, saying it has "put some weight" on survey evidence pointing to a higher GDP figure.

Philip Shaw, at Investec, said: "We tend to the view that there is an element of under-recording in the ONS figures and it is clear the Bank thinks so too."

The huge divergence between the official and private sector data on manufacturing, which makes up almost one-fifth of the economy, will make the job of the Bank's Monetary Policy Committee harder. An EEF spokesman said: "We have been pretty accurate for the past few years and we are concerned the Bank is being asked to make rate decisions on questionable data."

However Len Cook, the Government's chief statistician, defended his figures, telling The Independent ONS data was based on activity rather than "judgements about future prospects". "Surveys run by industry organisations have smaller sample sizes and tend to collect qualitative information on the changes since the last survey, rather than quantitative data on turnover and prices as in ONS surveys," he said.

Growing speculation that the MPC will order an increase in the base rate to 4.5 per cent on Thursday sent the pound to a nine-week high of $1.848 against the dollar.

A poll of 43 economists by Bloomberg showed that 24 predicted a quarter-point increase this week. The rest forecast an increase either in July or August.

Since November, the Bank has raised rates every three months to coincide with its quarterly inflation forecasts. But speculation is growing that the Bank is prepared to break its self-declared policy of "gradual" rises because of surging house prices, strong consumer spending and households' insatiable appetite for debt.

The minutes of last month's MPC meeting showed it debated a half-point increase, while its inflation forecasts showed inflation bursting through the 2.0 per cent target if rates remained unchanged.

There was further ammunition for those calling for swift rate rises to curb the consumer economy from a survey showing a sharp jump in high street spending last month. The British Retail Consortium said annual sales growth hit 6.5 per cent in May, the strongest growth since the bumper January sales.