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Thursday, 4 April, 2002, 05:29 GMT 06:29 UK
Rate rise fears as Bank meets
UK interest rate graph
Leading Bank of England economists are meeting to decide on interest rates amid mounting expectations of a rise in rates this year.

The April meeting of the Bank's monetary policy committee (MPC) comes after data showed that UK manufacturers had recorded their best performance for more than a year.

The figures, seen as showing that manufacturing was finally emerging from recession, will put pressure on the MPC to begin reversing the rate cuts introduced last year as global economic growth slowed.

"Manufacturing was a key factor behind the rate cuts last year and by the same token, recovery here will be instrumental to the tightening cycle," said Bank of America economist Deborah Reed.

Rates were last cut in November to 4.0%, their lowest rate since January 1963.

Economic revival

But manufacturing union Amicus warned the strong pound was still a problem, and said 60,000 jobs could be lost if no action was taken.

"Manufacturing is now facing a deepening recession," said Roger Lyons, general secretary of Amicus.

"Many companies will not survive it if the MPC fails to cut the interest rate by at least 0.5% this month."

Further evidence of a strong UK economy emerged earlier this week in figures from the Bank itself, showing that consumer credit had grown to 142.8bn as Britons continued to take advantage of cheap borrowing costs.

Reports from mortgage lenders have revealed a buoyant housing market, with the Halifax saying that house prices were 16.0% higher in March than a year before.

And data from the Confederation of British Industry showed strong retail sales, further fuelled fears that the Bank would act to take the steam out of the recovery, and ease fears of heightened inflation.

Inflation factor

But Ian McCafferty, the CBI's chief economic adviser, said that the rate of increase in sales had slowed.

"Shop sales have dropped down a gear," he said.

"They are still strong, but they have edged down from the peaks seen at Christmas and the New Year."

Latest UK inflation data shows price rises have yet to pose a concern.

And many observers have doubted whether the UK economy is yet sufficiently resilient to be able to absorb an interest rate rise.

"We believe the MPC will want to see confirmation that the industrial recovery is not only coming through on the official statistics but is sustainable before it starts to raise rates," said HSBC economist John Butler.

Analysts' forecasts

Rising oil prices are also expected to reduce the Bank's temptation to increase rates.

"We still believe the first rate rise will occur in July," Mr Butler said.

If consumer spending continued strong, a rise could come "as early as May", he added.

Danny Morgan, at JP Morgan, also supported the idea of rate rise in May.

"We do not expect anything other than rates to be left on hold this week, but the pressure for a May hike continues to build," Mr Morgan said.

The MPC will announce its decision at 1100 GMT.

See also:

03 Apr 02 | Business
UK house prices surge
20 Mar 02 | Business
Bank chiefs unanimous on rate freeze
19 Mar 02 | Business
UK inflation slows
07 Mar 02 | Business
UK rates kept at 4%
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