Price rises put pressure on rates

Speculation that interest rates might rise intensified yesterday as the latest snapshot of manufacturing showed price pressures are rising.

Fresh signs that industrial production is emerging from a period of stagnation were seen by the City as strengthening the hand of those on the Bank of England's monetary policy committee urging a pre-emptive rise in the cost of borrowing to safeguard the government's 2.5% inflation target.

The case for a rise in base rates is reinforced today by the latest monthly survey of the property market from Halifax, indicating that house prices were up 1.1% in August and 9.4% over the past year.

Although the treasury is concerned that bullish sentiment in the markets is threatening to run amok, a report from the Chartered Institute of Purchasing and Supply showed that the prices paid by manufacturers are rising for the first time in almost four years - an early sign of inflationary pressure building in the economy.

The manufacturing sector expanded for the third month in a row in August, although the rate of growth was slightly slower than in July, the CIPS said.

"Manufacturing has clearly turned the corner," said Ciaran Barr, economist at Deutsche Bank, adding that the improvement in domestic demand was boosting industry.

The City believes that the latest CIPS findings mean that interest rates have reached a trough at their current level of 5% but that further evidence of inflationary pressure will be needed before the Bank makes a move.

The CIPS report said a contraction of spare capacity had eased competitive pressures on suppliers and enabled them to raise their prices.

"Input price inflation was further stimulated by the increase in import prices resulting from the modest depreciation of sterling," it said. The prices index jumped to 53.2 from 47.2.

According to Halifax, the lower mortgage rates and the marked improvement in the economic climate have prompted the sharp increase in house prices this year. However, the bank says the fundamentals are not in place for a repeat of the boom of the late 1980s.