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Last Updated: Monday, 5 February 2007, 00:55 GMT
'Strong chance' of UK rates rise
Bank of England building
The Bank of England's rate rise in January came as a surprise
There is a "strong possibility" that interest rates in the UK will rise in February, according to a report.

Research by BDO Stoy Hayward, which unites the UK's main business surveys, shows that inflation expectations have "shot to a two-year high".

The Bank of England's Monetary Policy Committee (MPC) can up rates to tackle inflation or use a risky "wait and see" stance, BDO said.

The report comes after January's unexpected rate rise from 5% to 5.25%.

Business confidence

A rate rise in February "while the economy is able to absorb it, is the likely option", said BDO.

Despite economic growth being tipped to increase by 3% in the first six months of 2007, the report also showed a less positive outlook by firms.

"Worries over further interest rate rises are starting to dent business confidence", said BDO.

The rise in inflation has been especially obvious in the service sector.

Higher pay demands at the start of the year, as well as the impact of rising oil prices on travel costs and heating, have fuelled the rise.

"The economic news over Christmas and New Year pointed to strong activity in the UK", said Douglas McWilliams, chief executive of the Centre for Economics and Business Research (CEBR), a consultancy which prepares research for BDO.

The report concluded that "while inflationary pressures remain, more rate hikes are likely this quarter".

Recent figures from the Office for National Statistics (ONS) showed the UK economy grew at its fastest pace in two-and-a-half years for the last three months of 2006, spurred by demand for services.

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