Bank hints at new rate rise

THE City braced itself for a May increase in interest rates today after the Bank of England hinted that the cost of borrowing would have to rise again.

The warning, less than a week after the monetary policy committee lifted rates to 4%, came as the Bank upped its economic growth forecast for this year.

In its quarterly Inflation Report, the Bank said that although inflation was well below target at only 1.3% on the new CPI measure, it was expected to move up in the middle of this year, partly as a result of higher utility prices.

Thereafter, it is seen continuing to edge up to the 2% target as growing pressures on supply capacity add to a modest rise in import prices.

Bank Governor Mervyn King stressed that the trend in inflation was firmly upward. 'It is crucial to bear in mind that, in the central projection, inflation is continuing to rise at the two-year horizon and that the risks, although broadly balanced, are nevertheless considerable in both directions,' he said.

Economist David Hillier at Barclays Capital said: 'The implications are clear. The MPC will raise rates by a quarter-point at its meeting on 6 May.'

The pound rose as high as $1.8733, up a quarter of a cent on the day and just shy of yesterday's 11-year peaks, while gilts and short sterling futures fell.

The Bank also said the economic upswing was set to continue. Growth at the end of 2004 is expected to be about 3.2%, against the previous 2.8% forecast. It is expected to ease back next year as consumers rein in their spending, ending 2005 at about 2.8%.

The economic revival was reflected in news today that unemployment posted its biggest fall in two and a half years last month. The number out of work and claiming benefit dropped by 13,400 to 892,100 - the lowest since 1975.