Bank of England hints at rate hike

The Bank of England governor, Sir Edward George, today hinted at imminent action on interest rates when he warned that the bank would have "no option" but to raise rates if domestic demand growth did not slow.

Speaking to a parliamentary committee, Sir Edward said: "If it doesn't happen that domestic demand slows, and the external situation picks up, that's when it would generate inflationary pressure. At some point we will have to moderate the rate of growth of domestic demand."

The Bank's monetary policy committee (MPC) left rates unchanged at 4% for the seventh month running when it met in early June. Minutes from the May meeting revealed that members voiced growing concern at the rapid rise in house prices and strong consumer spending. But at the time, the MPC voted unanimously to leave rates unchanged in order not to undercut the fragile recovery in manufacturing.

But data this week showed that manufacturing may finally be emerging from its 18-month slump. Figures from the office for national statistics (ONS) showed that manufacturing output grew by 0.8% in April, with the hi-tech sector leading the rebound. If manufacturing continues to recover, that may be enough for the Bank to raise the cost of borrowing to prevent a boom-bust cycle in house prices.

The Bank's deputy governor, David Clementi, repeated his warning that house price inflation, currently running at over 18% annually, was "unsustainable". He called for a degree of caution among buyers and lenders, warning that the longer the boom went on, the sharper the correction in house prices was likely to be.

Some City analysts believe that a rise in interest rates could come as early as next month. Rates are at a 38-year low after the MPC lowered the cost of borrowing last year in an aggressive attempt to stave off recession in the world's fourth largest economy. But the Bank may have been too successful for its own good as low rates fuelled the housing market boom and a consumer spending spree.

Sir Edward also expressed surprise at official data that showed the economy grinding to a halt in the first quarter. The ONS last month revised down its estimate of GDP growth for the January-to-March period to zero despite signs of a buoyant domestic economy.

"We thought we would have seen positive growth," Sir Edward said. "The original estimate was marginally positive but now it has been revised down to zero. We can see an inconsistency between the statistics and the survey evidence including evidence from our agents around the country. They are subject to revisions, and we would expect this to be in a positive direction."