The low-down on an interest rate rise

BANK of England Governor Mervyn King has boasted of his ambition to make interest rate decisions as boring as possible. But with the City split virtually down the middle on whether the Bank's monetary policy committee will lift the cost of borrowing by a quarter-point to 4.25% tomorrow, this month's decision is anything but. We take a look at the economic indicators the MPC will scrutinise before announcing its verdict at midday tomorrow. Whatever the outcome, it's edge-of-the-seat stuff.

Housing market

The spring housing boom is in full swing. Figures last week from Halifax showed property prices leapt by 2.2% in March, while mortgage rival Nationwide reported a 1.4% increase. That pushed the annual rate of increase to about 18% - an unsustainable pace the Bank will be deeply uncomfortable with. The return of big City bonuses means prices in London and the South-East are rocketing again.

Consumer debt

Monetary medicine administered in November and February appears to have had no impact on consumers' appetite for debt. Mortgage borrowing grew at its fastest pace on record in February, up £9 bn during the month for a 14.5% annual increase. Meanwhile, mortgage equity withdrawal - where consumers unlock the rising value of their homes to finance higher spending - hit a record £16.2bn in the fourth quarter of last year.

Retail sales

Has High Street spending finally run out of steam? Early indications of March trading from the CBI showed a dramatic slowdown from the recent boom, with sales growth at its weakest for six months. Cold, wet weather at the beginning of March hit sales of spring fashions, but retailers are hopeful of an April bounce back.

Manufacturing

Mixed data has left economists confused about the health of British industry. While surveys and anecdotal evidence have been upbeat - the CBI declaring the end of the manufacturing downturn - National Statistics reported a disastrous 0.6% slump in factory output in February. Any recovery is likely to be fragile until the global economy picks up.

Service industries

This sector, which accounts for about 70% of the total economy, is firing on all cylinders. The closely-watched CIPS/Reuters purchasing managers' index revealed continued robust growth in March, albeit at a slightly slower pace than in February. And optimism in the key financial services sector is at its highest for five years, according to the CBI, thanks to the global economic recovery and stock market rally.

Inflation

Price pressures remain subdued despite the economic upswing. Inflation on the consumer price index fell unexpectedly to 1.3% in February as clothing prices failed to recover after the January sales. It has been below the Government's 2% target for more than five years. The Bank believes inflation will rise as the economy's spare capacity is used up.

Labour market

Gordon Brown received a Budget Day boost from news that unemployment fell to a new 29-year low in February. The number of people out of work and claiming benefit dropped by 6600 to 885,200. City bonuses drove average earnings growth to 4.4% from 3.5% the previous month, but experts said the figure would fall back.

Global economy

At last, the US recovery is generating new jobs. Non-farm payrolls surged by 308,000 in March, treble the increase expected by Wall Street pundits and the biggest for four years. But the eurozone economy remains in dire straits. London shares have slipped over the past month, the FTSE 100 index down by about 50 points.

MPC members' views

Arch-hawk Sir Andrew Large reiterated concerns about household debt while Paul Tucker said rates at 4% were stimulating the economy. Dove Kate Barker reminded the City that the MPC looked at the entire economy, not just the consumer. Governor Mervyn King, whose vote could be crucial, appeared to take a middle line.

Verdict

The MPC faces the delicate balancing act of slowing housing and borrowing booms without knocking confidence, driving up sterling and choking off the manufacturing recovery. It hopes to achieve this by adopting a softly, softly approach to tightening policy. For this reason, we think the Bank will leave rates on hold tomorrow, lifting them in May in conjunction with its quarterly Inflation Report. But with this month's meeting the most nail-biting for months, I wouldn't bet on it.