MPC member warns of further rise in rates

Hopes of a rebound for the UK economy rose yesterday as a leading business group increased its growth forecast and a senior Bank of England official warned that homeowners could be hit with another interest rate rise.

The CBI, the country's largest employers' organisation, said it expected the economy to grow 2 per cent this year, up from 1.8 per cent at its last forecast three months ago. "We can now be more confident that the UK is on the road to economic recovery," Ian McCafferty, its chief economist, said. "The international background in particular is a lot brighter."

Its latest survey of manufacturers found that domestic and export orders showed some improvement this month. Total order books had returned to August's levels and export orders were now at their highest for nearly a year and a half, it said. "The firmer global recovery is finally beginning to bolster export orders," Douglas Godden, the head of economic analysis at the CBI, said. "But conditions facing the manufacturing sector are still tough and are likely to remain so for a while to come."

The CBI also revised growth for next year up by 0.4 percentage points to 2.8 per cent, and the forecast for 2005 was set at 2.7 per cent. This is well below the Government's official forecasts for growth of between 3 and 3.5 per cent in both 2004 and 2005 and the CBI said slower growth would lead to higher public borrowing. But it said that as growth revived the Bank would raise interest rates by about 1 percentage point by the end of next year - a rise of 33 per cent from their current level of 3.75 per cent.

Charlie Bean, the Bank's chief economist and a member of its rate-setting Monetary Policy Committee, indicated rates would rise over the coming months, albeit slowly. "If growth stays above the UK's trend rate for any significant period, then further interest rate rises may be required," he told Bloomberg News. "We'll take this one step at a time. We want to look at this cautiously to see how things pan out."

He said the current level of rates was "probably below where it's likely to be some years down the road", adding: "In that sense, it's stimulative."

His comments are in line with the doveish remarks made by Mervyn King, the Bank's Governor, last week when he published its latest economic forecasts. Most City economistsexpect no change in interest rates until February.