Rate rise is 'foregone conclusion

The Bank of England is poised to raise interest rates for the first time in nearly four years this week. City economists say that a rise at the end of the meeting of the Bank's Monetary Policy Committee on Thursday is a 'foregone conclusion'.

A Reuters poll of economists showed that 37 out of 43 predicted that rates would increase by a quarter-point from the current 48-year low of 3.5 per cent.

Michael Saunders of Citigroup said: 'The MPC is likely to hike rates 25 basis points at the upcoming meeting. By acting pre-emptively, it can act gradually.'

Governor Mervyn King holds the key to the decision, having cast the decisive vote in the nine-member committee against a rise at October's meeting. Since then, data have backed up the picture of a booming housing market with a record £10.7 billion outlay of consumer debt in September alone, and very healthy retail sales, even as real wages have fallen.

The astonishing 7.2 per cent annual growth rate of the US economy between July and September will also reassure MPC members that the international recovery is on course and there is no longer any need to encourage UK consumers to pile on debt.

Armed with its quarterly Inflation Report, the Bank will also be better equipped to explain its decision. It has historically preferred to change policy direction in the month of the publication of the report, which will be released next Wednesday.

'While interest rates have changed in 27 per cent of non-Inflation Report months, they have changed in 44 per cent of Inflation Report months,' says Jonathan Loynes of Capital Economics.

Another factor is the use of a new economic forecasting model, introduced by King on a trial basis to help address fears that Bank forecasts have overestimated inflation.

The City will be watching carefully for any statement that accompanies the expected move. Although almost all economists anticipate a rise, the City is split between those who believe that a move this Thursday will be a solitary 'shot across the bows' of housing market exuberance, and those who believe it is just the start of a cycle that will leave rates above 5 per cent by 2005.

The rush to raise rates has come under criticism from economists, who say that the Bank is going beyond its remit by targeting house prices. However, it has received support from Gordon Brown's right-hand man, Treasury chief economics adviser Ed Balls.

'Just as the MPC took early action to cut interest rates in the face of a global slowdown, so too will they continue with this forward-looking approach to lock in stability as the British economy strengthens,' he told Tyneside business leaders last week.

Any rate rise may sit awkwardly with the Chancellor's plans to change the Bank's inflation target to 2 per cent on the harmonised measure, from the existing 2.5 per cent on the existing retail prices index (excluding mortgage payments) measure. Immediate introduction of a new target will see inflation substantially below target, rather than, as present, above it.