Bank set to signal early rate rise

The Bank of England may give a strong signal of higher interest rates when its Monetary Policy Committee meets on Thursday. Many City economists predict an early rate rise following massive upward revisions last week of Britain's economic growth performance.

'The MPC is likely to decide quite soon that it would be safer to reverse July's precautionary rate cut than to leave excess stimulus in place for too long. We suspect that rates will rise before year-end,' says Michael Saunders, economist at Citigroup.

Until last week's shock revisions, which doubled second-quarter GDP growth from 0.3 per cent to 0.6 per cent, most economists had pencilled in flat rates for some time to come. All but one of 49 City economists polled by Reuters expect Thursday's decision to keep rates at a 48-year low of 3.5 per cent for the third month. However there are expectations that at least one committee member may vote for a rise, for the first time since July 2002.

The decision is further complicated by the different paths of outgoing and incoming measures of inflation. Using the existing measure, RPIX - the retail price index excluding mortgage costs - inflation is expected to fall in the next few months. But on the new system, called HICP, which is expected to be introduced next month, it is rising.

The new Governor, Mervyn King, has talked of 'presentational difficulties'.

Alan Castle of Lehman Brothers says: 'All in all, we are sticking with our call that the MPC will keep rates on hold for the rest of this year, although the [Bank's] November Inflation Report meeting could be a very close call. Strong third-quarter GDP numbers and September retail sales could yet persuade the MPC that the precautionary rate cut in July should be taken back sooner.'

Meanwhile, the Chancellor will try this week to co-ordinate a push to kick-start moribund European growth. The Treasury will decide Britain's reaction to European plans to pump €220 billion into transport and IT projects over the next two decades.