Inflation pressure adds to impetus for rate rise

Business confidence is running at its highest level for six years but strong economic growth appears poised to push inflation above its target level, according to a report published today.

With house prices continuing to rise strongly, the increasing evidence of inflationary pressures within the economy means the Bank of England's monetary policy committee is under pressure to raise rates again.

The MPC meets this week and while most analysts expect it to leave borrowing costs unchanged this month after last month's increase of a quarter point to 4%, the City is predicting a further increase in either April or May.

In a report published today, accountants BDO Stoy Hayward warn inflation is becoming an increasing concern for business. Its inflation index "implies that inflation will edge 0.1% above the Bank of England's target of 2% in the third quarter of 2004 as firms ramp up efforts to benefit from the unusually strong demand on the high street".

With business confidence running at its highest level for six years, BDO Stoy Hayward is predicting that economic growth will top 3% in the third quarter. Britain's hard pressed manufacturing sector is still struggling, however, and the BDO Stoy Hayward index shows manufacturing optimism is barely edging up.

"Emerging inflationary pressures, both worldwide and in the UK, mean that a rate rise in the next three months is virtually a done deal but the Bank may wait for the main inflation report before moving," said Douglas McWilliams, chief executive of the Centre for Economics and Business Research.

But while the Bank of England is coming under pressure to raise interest rates the European Central Bank, which also meets this week, is facing calls to move in the opposite direction.

Senior politicians and business leaders in the euro-zone are alarmed that the strength of the single currency against the dollar could choke off the region's struggling recovery. German chancellor Gerhard Schröder and France's prime minister, Jean-Pierre Raffarin, are among those who have demanded action from the ECB.

The Frankfurt-based institution is, however, seen as unlikely to respond immediately, fearing that a cut now would be seen as caving in to political pressure.