Treasury backs interest rate rise

The Treasury last night gave its strong backing for the Bank of England to raise interest rates tomorrow when Ed Balls, the chief economic adviser to Gordon Brown, said a pre-emptive strike was needed to maintain economic stability.

In a speech in Leeds that coincided with an upbeat survey of retailing in January, Mr Balls pointed to signs of stronger activity across the UK and warned that governments paid dearly in the past for ignoring similar evidence.

"Having been the only economy to avoid recession, our challenge now is to entrench stability for the long term," Mr Balls said. "It is precisely at this stage of the economic and electoral cycle that past British governments have resorted to short-termism. We will not repeat those mistakes."

Mr Brown handed over operational control of interest rates to the Bank within a week of Labour's election win in May 1997, but Mr Balls made it clear that the chancellor would fully endorse whatever decision the monetary policy committee made this week. The MPC will conclude its two-day meeting tomorrow lunchtime and both the City and industry are expecting a quarter-point increase to 4%.

"There is now a consensus - across both industry and the regions - that a forward-looking and pre-emptive approach to monetary policy, backed by a sound fiscal policy, is the best way to lock in stability and deliver balanced regional growth," Mr Balls said. "With a strong platform of stability, our new regional and urban policy can deliver this government's economic goals: full employment and higher growth in every region of Britain as we close regional divides."

The CBI said its monthly snapshot of almost 250 retailers showed that business last month had been far brisker than stores had been expecting and was well above average for the time of year. Only 15% of retailers said sale volumes were lower than in January 2003 while 53% said they were higher. The gap of 38 percentage points between the better performing stores and the worst was the highest for 20 months.

Ian McCafferty, chief economic adviser at the employers' organisation, said that trading statements from companies over the past month had dealt with specific stores or goods. He urged the Bank not to tighten policy too quickly.

"Overall the retail sector looks to be healthy, but reports of price discounting suggest that competition remains intense and firms will be hoping that the Bank continues its gradualist approach to raising rates."

The CBI said anecdotal evidence pointed to widespread discounting last month, but added that the trend was upwards. Retailers expect strong sales growth to continue into February, although at a slightly lower rate than in January.

Amid fears that consumers are increasingly dependent on credit, the Liberal Democrats predicted yesterday that Britons would have debts of £1 trillion (£1,000bn) by this summer.

Vincent Cable, the LibDem Treasury spokesman, called on Mr Brown to take responsibility for reining in irresponsible lending on mortgages, personal loans and hire-purchase deals.

"British consumers have been on the biggest borrowing binge in history. Consumer borrowing has been keeping the British economy going but this isn't sustainable.

"Any sensible person will know that you cannot simply keep on borrowing more than you can afford to pay back," Mr Cable said.