Bank faces acid test over rate rise

THE credibility of the Bank of England will be on the line on Wednesday as it tries to justify last week's quarter-point rise in interest rates.

Its key inflation report must explain why borrowing costs are going up, even though inflation is well below its 2% target.

Some suspect the Bank's Monetary Policy Committee (MPC) is effectively ignoring the new Consumer Price Index (CPI), which Chancellor Gordon Brown imposed last month as the committee's target measure.

Bank Governor Mervyn King will have to crush such speculation or face a crisis of confidence in the MPC. 'It could blow up in their faces if it is not handled properly,' said Peter Dixon, economist at Commerzbank.

CPI inflation is 1.3% and has not touched 2% since May 1998. To justify the interest rate rise, Wednesday's report will have to say the MPC genuinely fears rising inflation.

The report is also likely to claim the CPI will be at its target rate of 2% by February 2006 - though the consensus among City analysts is for it to be no higher than 1.8%.

Ross Walker, economist at Royal Bank of Scotland, said: 'This report will be of great interest because we suspect that at least some of its members do not believe the CPI is giving a correct reading of inflation.'