Interest rate rise 'certain' as economy grows

Britain's manufacturing sector grew at its fastest pace in nearly a decade as foreign and domestic orders surged, official figures showed today.

The closely-watched Chartered Institute of Purchasing and Supply's purchasing managers' index (PMI), a compilation of separate indices to measure overall activity, stood at 56.3, with a reading above 50 representing growth.

The figure - compared with a revised figure of 55 for June - was the highest since October 1994. The strong showing for manufacturing - for so long the ugly duckling in the UK economy - makes it all but certain that the Bank of England will raise interest rates this week. This would be the fifth upward move since November.

Rates currently stand at 4.5%, a percentage point above where they were at the end of last year.

Today's data follow a spate of strong economic indicators, from a resurgence in house prices, record levels of household debt - Britons now owe a total of ?1 trillion - and buoyant sales figures.

The Bank of England has already expressed concern that strong economic growth is building up inflationary pressure.

Some analysts say the Bank's monetary policy committee needs to push up rates by 50 basis points on Thursday if it really wants to take some wind out of the economy. But that is unlikely to happen as Bank officials have made it clear that they have no interest in "clobbering" the consumer.

"We still expect a 25 basis point interest rate hike on Thursday. However, we believe a further 25 basis point interest rate hike in September is highly likely unless there is clear evidence of a slowdown in retail sales, consumer borrowing and house prices over the next month," said Howard Archer of Global Insight.

Today's figures backed up last month's official data, showing a 0.5% expansion in manufacturing between April and May. The CIPS report reflected continued growth in output and new orders within the manufacturing sector.

The index for output accelerated to 59.5 against a revised level of 57.9 for June, while the new orders index rose to 58.1. High oil prices pushed up the cost of materials such as plastic and chemical products, and contributed to a rise in input prices for the 11th month running.

However, the pace of growth was driven by strong domestic and international demand. Roy Aycliffe, director of professional practice at CIPS, said: "Despite rising costs, firms stepped up their purchase of raw materials to meet increasing demand and guard against future supply shortages."

Today's report also showed an increase in manufacturing staff numbers for the fourth successive month.