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 Economic data points to rate rise

Record lending, strong retail sales and further evidence of a recovery in manufacturing today reinforced expectations of a rise in UK interest rates this week.

With today's data pointing to a buoyant economy, it is thought the Bank of England's monetary policy committee (MPC) will raise interest rates by 0.25% to 4.25% on Thursday, in keeping with its "gradualist" policy.

The move would be the third tightening of the monetary screws since November, when the MPC raised rates from their 48-year low of 3.5%.

The Bank's own lending figures showed consumer appetite for debt remained undiminished during March, with both mortgage lending and borrowing, through credit cards and loans, remaining strong.

The Bank said net mortgage lending, which excludes redemptions and repayments, rose by ?9.3bn during the month, the highest figure since October last year.

At the same time, people borrowed a record ?18bn through unsecured debt, including ?11.9bn on credit cards, also a new high.

Once repayments were taken into account, outstanding debt on credit cards, loans and overdrafts rose by ?1.6bn, in line with February's increase.

Within this figure, credit card debt rose by ?963m, to leave consumers collectively owing ?54bn on their plastic.

Meanwhile, the Confederation of British Industry (CBI) reported strong growth in retail sales in April after Easter spending.

According to the organisation's monthly distributive trades survey, sales returned to buoyant levels seen earlier this year after a brief dip in March.

April takings were above the average for the time of year.

Sales were up on last April, 51% of firms said, while 21% said they were down.

That balance of 30% compares with 17% in March and 26% in February, and retailers forecast a further improvement in sales this month.

As for manufacturing, the purchasing managers' index (PMI) from the Chartered Institute of Purchasing and Supply - a composite measure of activity in the manufacturing sector - rose to 55.1 in April from 53.8 the previous month.

Any figure above 50 indicates growth; any below 50, contraction.

The bullish report was at odds with the latest official data, which showed a fall in manufacturing output.

However, economists expect the official figures to be altered.

"We strongly suspect that the official data will be revised up," said Chris Williamson, chief economist at NTC Research, which compiles the PMI survey. "We think the first quarter has been good in the UK and in Europe."

Despite a strong increase in new orders, the exports index rose only marginally in April, from 53.4 to 53.8.

That was partly because the strength of the pound hit orders from abroad.

"With little sign of a slowdown in high street activity, the economy continues to grow well," said John Longworth, chairman of the CBI's distributive trades survey panel.

"If this continues, interest rates will have to increase to a more neutral level later this year.

"But the Bank of England must be careful not to stifle the economic recovery by abandoning its well-signalled, gradualist approach to rate rises."

All but one of 46 economists polled by Reuters news agency last week predicted an increase in interest rates this week.


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