Pressure builds for rate rise

THE Bank of England's monetary policy committee kicks off its latest interest rate meeting tomorrow with the outcome balanced on a knife-edge.

With City economists split on whether interest rates will be lifted another quarter-point to 4.5% when the decision is announced at midday on Thursday, the MPC faces a familiar dilemma - it wants to cool the housing and borrowing booms without choking the fragile manufacturing recovery.

The cost of borrowing was raised in quarter-point steps in November, February and May. But with no sign that those moves have dampened consumers' appetite for borrowing and spending, the MPC has signalled its intention to accelerate the pace of tightening.

Last month's surprisingly hawkish Inflation Report showed inflation overshooting its 2% target in two years, despite the latest rate increase.

Meanwhile, the minutes of May's meeting revealed the MPC considered raising rates by half a point.

'The MPC is giving a signal which could not be less ambiguous if its (inflation forecast) fan charts had rate hike alert stamped all over them,' said Philip Shaw at Investec.

The weight of evidence over the past month has arguably pointed to the second rate rise in as many months.

House-price inflation is running close to 20%, mortgage borrowing is rising at a record pace, Britain's household debt mountain is on course to top £1 trillion and consumers are still splashing out on the High Street.

However, rate doves will be clinging to official data showing the manufacturing sector in recession, despite survey evidence pointing to an industry revival.

They will also argue rocketing oil prices threaten to hamper the recovery by hitting motorists and manufacturing in the pocket. Finally, inflation at just 1.2% is well below target.

A Reuters poll of 45 economists found 27 forecasting a rate rise on Thursday, although the probability of a move was put at just 44%. City bookie Cantor Index is quoting a spread of 438 to 441 (4.38% to 4.41%) on the outcome of the meeting, implying rates will rise - just.

Geoff Dicks, at Royal Bank of Scotland, said: 'If the MPC is minded to raise rates before the next forecast round in August, there is little point in delaying until July.'

Melanie Baker at Morgan Stanley disagrees. 'We think they will wait until July, having only just raised rates and with the Bank still wary of shocking consumers,' she said.