Fears over second rate rise

BANK of England Governor Mervyn King and his colleagues on the Monetary Policy Committee face an agonising decision on the cost of borrowing this week.

The committee will vote on Thursday over whether the base rate should go up to 4%. The MPC pushed it up by a quarter of a percentage point to 3.75% this month - the first rise in nearly four years.

In its six-year history, the MPC has always followed a rate rise with another the following month, but it has never raised it in December ahead of the Christmas shopping season.

This week's decision is complicated by the fact that it is almost certainly the last MPC meeting before Gordon Brown gives the Bank a new inflation target.

Next week, the Chancellor will use his Pre-Budget Report to confirm a change in the inflation measure from RPIX to Europe's HICP.

Given that HICP gives lower inflation readings than RPIX, some think the committee might grab this opportunity to justify a rate rise on the grounds that RPIX is still above target.

City opinion is divided, though a majority of those surveyed by information group Reuters last week said they believed the MPC would hold fire.

Depressed consumer confidencefigures last week were partially offset by an upward revision to growth figures for the third-quarter of this year.

Trevor Williams, economist at Lloyds TSB, said: 'The precedents are not good because there has never before been a one-off rise followed by no change. But there isn't really a convincing case for a rise and people have more debt, so the effect of any rise is more powerful.'