Bank signals rate rise

The City was last night bracing itself for an early rise in the cost of borrowing after the Bank of England warned it was "standing ready" to combat the threat of higher inflation.

Despite official figures released yesterday showing a 5,000-plus increase in unemployment last month, the Bank said that soaring house prices, robust consumer spending and the prospect of a recovery in the world economy were adding to inflationary pressures.

Financial markets interpreted the hawkish tone of the Bank's quarterly inflation report to mean that interest rates - on hold at 4% since November - were on the point of rising from their 38-year low and could hit 5% by the end of the year.

Mervyn King, the Bank's deputy governor, said rates had been left on hold last week for the sixth month because of the imbalances in the economy between the strength of consumer demand and the weakness of manufacturing, exports and investment.

"The imbalances are very real and very large," he said. Data from the office for national statistics showed that Britain's manufacturing sector is continuing to shed jobs in the face of weak global demand and a strong pound.

Overall, the number of people out of work and claiming benefits rose by 5,400 to 953,000 in April, pushing the jobless rate up to 3.2% from 3.1% a month earlier. The small fall in joblessness reported in March has been revised to show a rise of 2,000.

The Bank said that unemployment had remained "broadly constant" over the past year, but unions said the rise illustrated the strong pressures still facing manufacturers, with output falling at its fastest rate for 10 years.

John Monks, the TUC general secretary, said the figures highlighted the "fragility" of the recovery in the labour market and he called for a further cut in interest rates to help beleaguered exporters.

The Bank believes that the economy reached a trough in the final three months of 2001, with recent surveys pointing to a recovery. "The central projection is for growth to recover to above-trend rates as stronger world demand and higher public spending outweigh a modest easing in household spending growth," the inflation report said.

Describing the recent surge in house price inflation as unsustainable, Mr King said the Bank expected the economy to pick up steam over the coming months and that the outlook was for inflation to rise above its 2.5% target level in two years' time if interest rates were left unchanged.

The report also expressed some concerns about the impact on inflation of the increases in national insurance contributions announced in last month's Budget. "It is also possible that higher national insurance contributions required of employees and employers may add to wage and price pressures," it warned.

Mr King told a press conference that, if higher national insurance contributions lead to higher inflation, "the committee would take action to ensure that the inflation target was met".

He added that the impact of the Budget on inflation over the next two years was likely to be small, "although it may be larger further ahead".