Rates left on hold as economy speeds up

The Bank of England resisted calls to cut interest rates yesterday as a fresh batch of figures showed an economy firing on all cylinders. House prices, mortgage lending and activity in the UK's dominant services sector all grew at their fastest pace for more than two years.

The figures, which followed data this week showing an upturn in retail sales and manufacturing output, boosted speculation the next move in rates would be up.

The Bank's Monetary Policy Committee left the base rate at 4.5 per cent for the ninth month in a row. Analysts now await its quarterly inflation forecasts next week.

Alan Clarke, UK economist at BNP Paribas, said: "The case for a hike is increasingly strong." Last week the National Institute for Economic and Social Research urged the Bank to raise rates to head off a rise in both inflation and households' inflationary expectations.

But David Frost, the director general of the British Chambers of Commerce, "strongly rejected" calls for a pre-emptive increase in rates. "Such a move would be extremely damaging. Indeed, given the risks facing the economy, we believe the MPC may need to consider a cut in interest rates later in the year if economic circumstances worsen," he said.

Halifax, the UK's largest mortgage lender, was first out of the blocks with upbeat data. It said the price of the average home jumped 2.0 per cent between March and April. This was the strongest rise since April 2004 and took the annual rate to a 13-month high of 8.0 per cent.

John Butler, UK economist at HSBC, said the 4.5 per cent increase over the past three months translated into annual inflation of 18 per cent. "At face value that is not stability, that is the type of pace associated with a boom," he said. But Martin Ellis, its chief economist, played down the prospect of a boom, saying higher utility and council tax bills would dampen enthusiasm for house purchases. "While the market may remain relatively buoyant over the coming few months, we expect the recent softening in the labour market in relation to earnings to curb demand," he said.

There was fresh evidence of a strong surge in activity from Bank of England figures showing mortgage lending hit a 28-month high in March. Homebuyers borrowed £9.3bn, the biggest rise since November 2003 when the Bank last started raising rates.

But unsecured borrowing - bank loans, credit card spending and HP agreements - hit its lowest level for more than a decade. Households borrowed just £300m in March, down from £1.2bn in February, and the lowest level of borrowing since February 1994.

The services sector posted its strongest growth since December 2003, according to the Chartered Institute of Purchasing and Supply. Its overall index jumped to 59.7 in April from 57.4 in March on a scale where a number over 50 indicates expansion.

Trichet hints at Eurozone rise next month

The European Central Bank sent out a clear signal yesterday that it plans to raise interest rates next month to tackle the threat from rising inflation.

The ECB left rates on hold but Jean-Claude Trichet, its president, said the central bank would exercise "strong vigilance" - a phrase he used repeatedly in a news briefing after the decision.

The euro vaulted to a fresh one-year high against the dollar, gaining as much as a cent to $1.2694 as analysts debated whether the ECB could even opt for a hefty half-point rate rise.

"The governing council will exercise strong vigilance in order to ensure that risks to price stability over the medium term do not materialise," M. Trichet said.

He said further policy tightening would be warranted if the economy continued along its trend path of about 2 per cent GDP growth. "If the main scenario is confirmed, further withdrawal of monetary accommodation would be warranted," he said. Economists were unanimous in pencilling in a quarter-point rate rise to 2.75 per cent next month. Nick Stamenkovic, at RIA Capital Markets, said: "The message from M. Trichet could not be clearer - rates are going up."

M. Trichet expressed confidence about prospects for the eurozone and a renewed determination to tackle inflation, which reached 2.4 per cent in March. The ECB's goal is just below 2 per cent.