'Summer rate rise' signalled

CITY economists predict that the Bank of England will start lifting interest rates in the summer as increasing signs of economic recovery emerge, a poll for the Evening Standard's Business Day section shows.

Top banks and stockbrokers think the most likely month for the Bank to pull the rates trigger is August, although some say the cost of borrowing could begin to rise as soon as May.

On average, rates are expected to end the year at

4.5%, half a percentage point above their current level. That is a much smaller increase than financial markets are pricing in. According to the short sterling futures market, rates will have risen to 5.5% by Christmas.

Predictions range from the most hawkish forecast of 5.25% rates by year-end from Lehman Brothers to the dovish team at Roger Bootle's Capital Economics, which believes rates will remain at 4% all year.

Bang in line with the consensus forecast are Deutsche Bank, Royal Bank of Scotland and Societe Generale, all of which predict rates will end the year at 4.5% with the first increase coming in August.

Royal Bank of Scotland's Ross Walker said: 'A global recovery could be the main factor prompting the Bank to put up rates. But at the moment manufacturing output is still falling and we expect consumer spending to start easing, so there is no pressing need to jack up rates immediately.'

Brian Hilliard at Societe Generale said: 'Parts of the jigsaw are fitting together and pointing to stronger growth. The Bank will start to get itchy by the middle of the year.'

Capital Economics' Jonathan Loynes, forecasting that rates will not start rising until the first quarter of next year, said: 'The international economy will remain quite weak this year. Inflation will stay very low and we think it will be some quarters before industry can take up the reins of growth from the consumer.' Other doves, pencilling in only one quarter-point increase this year, are Jeremy Hawkins at Bank of America and Simon Rubinsohn at brokers Gerrard.

Firmly in the hawks camp, and predicting that rates will start rising in May, is Lehman Brothers' Michael Hume. He said: 'The first move by the Bank will be a pre-emptive hike to signal it wants rates back at a higher level. The other increases will result from a much stronger economy internationally and resilient domestic demand.'

David Hillier at Barclays Capital also predicts fairly aggressive policy tightening, with rates ending the year at 5%. He said: 'The idea that there will be a sharp slowdown in consumer spending on the back of household indebtedness is wrong.'