City expects MPC to raise loan rates

Business leaders yesterday appealed to the Bank of England's monetary policy committee to spare industry an interest rate rise when it holds its first meeting of the new year this week. But with house prices rising rapidly and earnings growth drifting upwards, the City expects the appeal to go unheeded.

Most analysts are anticipating a quarter-point increase in the cost of borrowing to 5.75% on Thursday, with a few opting for a bigger 0.5% point rise.

In an interview on GMTV's Sunday Programme, Digby Jones, the new director general of the Confederation of British Industry, said he did not want a return to boom and bust. But he added that the MPC should give growth a chance before raising rates, already increased twice since September, again.

"Look at it again in February, and look at it again in March, but no interest rate rise would be very good news for the UK economy," said Mr Jones.

The City regards a rate rise from 5.5% as almost inevitable after a raft of data in the past few weeks showing house prices rising at the fastest rate since the late 1980s boom, earnings growth accelerating towards 5% and a surge in high street spending over Christmas.

At the last MPC meeting in December, three out of the nine MPC members voted for a rise and a majority of the others agreed that it was likely that a further tightening of policy would be needed to ensure the government hits it 2.5% inflation target.

The latest figures are likely to convince the committee waverers that now is the time to act, say economists.

In its World Outlook 2000, published today, the Economist Intelligence Unit predicts British rates will peak at 6.25%, compared to 7.5% during the previous cycle.

It says sub-Saharan Africa, one of the world's poorest regions, will be the fastest growing area this year followed by the Middle East and north Africa, Latin America and north America.

"Higher commodity prices will benefit sub-Saharan Africa, which is forecast to grow by 4% in 2000, the best performance of any region," says the unit. "Mozambique will be the fastest growing country in 2000, based on strong growth in mining."