Rate rise in the offing, CBI says: Strong domestic demand reflected in manufacturers' intention to drive output levels and prices higher

THE Confederation of British Industry said yesterday that interest rates might soon have to rise to curb incipient inflation, as buoyant demand has left manufacturers increasingly confident that they will be able to raise their prices.

The CBI's latest monthly industrial trends survey shows that manufacturers plan to step up production at rates not equalled since the boom of the late 1980s. But the CBI still expects the pace of economic recovery to slow in the second half of the year as tax increases subdue high street spending. They expect growth of 3 per cent for 1994, compared with the Treasury's summer forecast of 2.75.

The CBI said there was no case for an imminent rise in interest rates, but that strengthening inflationary pressure was likely to make a quarter-point rise in base rates necessary later this year. The Chancellor of the Exchequer and the Governor of the Bank of England meet to discuss interest rates early next month, with City analysts expecting no change.

Some 39 per cent of manufacturers told the CBI they planned to raise output in the next four months, compared with 9 per cent expecting to rein back. The balance expecting to raise output was the highest since 1988.

Manufacturers reported order books above normal for the first time in five years, with domestic orders improving more dramatically than exports.

'These results show the upturn in manufacturing is likely to continue at a healthy pace, with export demand improving as European markets start to recover,' the CBI economist Sudhir Junankar said.

The survey showed a rise in the number of manufacturers expecting to raise their delivery prices in the coming four months, which could herald a pick-up in factory gate inflation. The net balance expecting to raise prices rose from 12 per cent in June and July to 15 per cent in August. After adjusting for normal seasonal effects, the rise was more dramatic still.

But Mr Junankar added that 'with strong competitive pressures in the home market, it is not certain that companies will be able to raise prices to the extent that they expect'. The Bank Governor has argued that interest rates should rise before resurgent inflationary pressure shows up in the official figures.

The CBI's decision to raise its forecast of economic growth this year from 2.4 per cent in May to 3 per cent now brings it into line with the City and academic consensus, although the forecast does not take into account the upward revisions to gross domestic product figures announced by the Central Statistical Office on Monday. But the CBI now expects the pace of growth to slow next year, remaining at the 2.5 per cent forecast in May.

Kate Barker, the CBI's chief economic adviser, said the economic outlook suggested that interest rates should remain stable for now, and that the Chancellor should not make any significant injection or withdrawal of spending power into the economy in November's Budget.

'But a small rise in interest rates early on may be better than a big one later,' she added.

The CBI raised its forecast of growth in manufacturing output this year from 2.7 to 3.4 per cent and also took a more upbeat view of prospects for unemployment next year.

Consumer spending growth is expected to slacken during the rest of the year as Budget tax increases depress people's take-home pay, although consumer confidence is expected to grow more quickly than in the spring.