British interest rates set to rise

British interest rates are highly likely to go up next month, economists said yesterday after it was revealed that the Bank of England came within a whisker of raising rates at its last meeting.

Only the vote of governor Mr Mervyn King stopped the Bank's Monetary Policy Committee (MPC) from increasing the main interest rate by a quarter-point to 3.75 per cent two weeks ago.

The minutes yesterday confirmed that rates are at their trough and prompted many economists, surprised at the closeness of the vote, to forecast an increase next month.

"A rate hike in November appears inevitable," said Mr James Carrick of ABN Amro.

The futures market expects rates to move to 3.75 per cent next month and 4 per cent by the end of the year, while the pound jumped close to a five-year high against the dollar.

But Mr Alan Castle of Lehman Brothers said it would be wrong to assume a hike was a done deal.

"We're slightly wary because there's some very important data out tomorrow and they could have a significant impact on the way the MPC approaches inflation," Mr Castle said.

Although some MPC members wanted to wait for tomorrow's third-quarter data to clarify the mixed messages about the economy, the minutes nevertheless showed there was broad-based support for higher rates. But the majority was concerned that a "premature" rise in rates might "choke off the improvement in business conditions".

The strength of the desire to raise rates, which would be the first tightening in almost three years, caught economists off guard, but it was the voting patterns that really surprised.

The governor, traditionally in favour of higher rates, voted with the doves, as did Ms Rachel Lomax, the deputy governor who opposed July's precautionary cut.

The main argument in favour of a rate rise stemmed from concerns about the continued strength of the housing market and the accompanying record levels of consumer debt.

Overall, the prospects for domestic demand appeared stronger, it said.

Those wanting an early rise also pointed to the better outlook for the US, the upward revisions to UK growth estimates and the stronger corporate sector, as reflected in rising equity prices.