Rate rise ahead on road to recovery

PRESSURE is mounting for an interest rate rise, though the Bank of England's monetary policy committee is likely to leave the cost of borrowing unchanged when it meets this week.

Money market rates for December are 3.88%, a clear signal that dealers expect a rise by the end of the year.

A key business survey on Monday will conclude that 'the UK economy finally appears to be entering a period of sustained recovery', adding to the momentum for a rise.

The base rate of 3.5% is widely tipped to hit 3.75% by February at the latest.

Figures due on Tuesday for mortgage equity withdrawal are expected to show record borrowing during the second-quarter with homeowners cashing in on the value of their houses to feed the consumer spending binge.

This will increase pressure on Bank Governor Mervyn King and his colleagues on the MPC to increase the base rate.

Ross Walker, economist at Royal Bank of Scotland, said: 'Markets are convinced that the next move is up. Not only did the Office for National Statistics tell us last week that growth earlier this year was stronger than we had thought, but growth in the third quarter is likely to be above trend.'

Tomorrow's business trends report from accountant BDO Stoy Hayward will show increasing optimism as 'recovery in world markets has a knock-on effect'.

The Stoy report adds: 'Hawks on the MPC will push for a rise, but we believe that an increase would be premature and that the committee should await clearer evidence on the pace of recovery.'

Trevor Williams, economist at Lloyds TSB, agreed: 'The case has not been made for a rise. House prices are beginning to slow, as is spending. There is no sense of the economy getting out of control.'