Rate rise likely on strength of new data

Robust manufacturing data released today reinforced the case for higher interest rates when the Bank of England monetary policy committee meets later this week.

According to the latest purchasing managers' index (PMI) from the Chartered Institute of Purchasing & Supply, the pace of expansion in manufacturing held steady at a four-year high in January while order books surged to a new four-year peak.

The PMI stood unchanged from December at 56, well above the 50 mark that divides expansion and contraction, though the unchanged number broke a 10-month run of gains in the index.

Even before today's data, most analysts were firmly convinced that the Bank's monetary policy committee (MPC) will raise the cost of borrowing on Thursday to 4% from 3.75%. Nearly all those who participated in a recent Reuters poll predicted that the Bank will nudge up rates.

Those predictions followed recent news that retail sales surged over the Christmas period despite initial fears of a poor shopping season, and strong economic growth in the fourth quarter.

Last week, the Confederation of British Industry (CBI) declared the slump in Britain's manufacturing sector over as total orders hit their highest level in seven years. In addition to a strong growth in orders, the CBI reported the highest jump in output for over eight years, and an increase in confidence for the first time in 18 months.

The upbeat data from the manufacturing sector will come as a relief not only to hard-hit companies, but to policy makers who have been worried about the "two-track" nature of the UK economy, with growth relying too much on consumers rather than producers.

"Companies are planning to increase employment and capital expenditure over the next year, the first time they have been prepared to do that for several years now," NTC Research economist Chris Williamson told Reuters.

At the last MPC meeting in early January, only one member - the deputy governor, Sir Andrew Large - voted in favour of higher rates. Sir Andrew cited the high level of household debt and the continued strength of housing prices to press for an increase of 0.25%.

But the other MPC members argued that there were few signs that costs and prices were rising rapidly. They also expressed concern at the decline of the dollar, which could stifle the budding recovery in the eurozone, a significant source of demand for UK goods.

The Bank's dilemma is that while economic activity is picking up, inflation remains well below the Treasury-set target of 2%. In January, the consumer prices index, the government's new measure of inflation, remained unchanged at 1.3%.