City is divided over case for rate rise

CITY economists are split down the middle on whether the Bank of England will lift interest rates next week or wait until July to cool the rampant consumer.

Five of 10 leading Square Mile analysts quizzed by the Evening Standard believe the cost of borrowing will be raised by a quarter-point to 4.5% on Thursday, the second such move in as many months. The other five expect the MPC to wait until July before pulling the rates trigger.

Rates are seen continuing to rise in coming months, topping out between 4.75% and 5.25%, according to most economists.

The Bank's monetary policy committee has lifted rates in quarter-point steps in November, February and May to their current level of 4.25%. But it signalled its intention to step up the pace of tightening in last month's surprisingly hawkish Inflation Report, which showed inflation overshooting its 2% target, despite the latest increase.

The minutes of last month's MPC meeting, which revealed the committee discussed the possibility of raising rates by an unprecedented half-point, have also stoked speculation of an immediate move. Meanwhile, there are no signs that consumers' appetite for borrowing and spending is waning, or that the housing market is slowing.

City bookies Cantor Index are quoting a spread of 438 to 441 (4.38% to 4.41%) on the outcome of next week's meeting, implying that rates will rise - just.

Philip Shaw at Investec, predicting a move next Thursday, said: 'Consumers have responded to the rate hikes so far as though they haven't happened. The MPC has signalled its intention to step up the pace of tightening and we don't see any reason for it to hold fire next week.'

Adam Law at Barclays Capital, also plumping for a June increase, said: 'The Inflation Report effectively presents the case for another rate hike and the Bank will want to get on and do it.'

Geoff Dicks at Royal Bank of Scotland said rocketing oil prices would give the MPC the perfect excuse to lift rates again next week. 'The fact that petrol prices will push inflation up from 1.2% to 1.5% in a single month gives them the perfect inflation peg to hang their debt worries on,' he said.

However, Brian Hilliard at Société Générale believes the MPC will be reluctant to abandon its gradualist approach in favour of two consecutive monthly moves. 'It is clear that the Bank has to up the stakes in terms of slowing the consumer, but going in June would be far too dramatic,' he said.

John Butler at HSBC said: 'The MPC will want to wait to see whether the May move had any impact on consumer behaviour.'