Two further base rate rises predicted
The latest figures from the Chartered Institute of Purchasing and Supply show that UK manufacturing output is accelerating faster than at any time in the last three years.
This combined with strong price increases has led some economists to predict that there could be two increases in interest rates before the turn of the year.
The Bank of England is coming under renewed pressure to increase its base rate, which currently stands at 5.75%.
The rate is at its highest for six years, and some analysts are warning that there is good chance that it will be at 6.25% by the beginning of 2008.
The bank’s Monetary Policy Committee (MPC) is currently holding a two-day meeting to set rates for August and is widely expected to leave the base rate at 5.75%.
However, the strong performance by the manufacturing sector was not unexpected and if there is no rise in July, an August rise would seem likely, as any increase in manufacturing output is likely to impact on interest rates sooner rather than later.
The situation is compounded by the fact that the bank is still concerned that house prices are rising too quickly, despite the slowdown in house price inflation in June.
The outcome of the August MPC meeting is difficult to predict as some leading members of the committee believe that the full effects of earlier interest rate rises have yet to be felt.
Inflation remains at 2.4%, ahead of the Government’s 2% target and in such circumstances the bank’s governor, Mervyn King, is likely to support an increase.