City braced for interest rate rise Growing strength of economy expected to trigger first of a number of increases this year

A hike this week, already factored in by many City analysts, would be the first increase in the cost of borrowing since November, when the nine-member MPC upped the rates by 0.25% to 3.75%.

Philip Shaw, an economist at investment bank Investec, said a rise this week could be the first of several.

He said: ''A buoyant economy and a helpful background for the UK consumer should mean a continued steady stream of rate increases over the next year or so,''

Some analysts believe that rates will hit 4.5% by June and reach 5% by the end of the year.

As for this week's MPC decision, a poll by Reuters found that 43 of 46 economists were expecting a quarter-point rise.

Adding fuel to the fire, MPC member Paul Tucker last week said that UK interest rates would need to climb gradually if the economy runs in line with government's economic forecast.

He said: ''The recent position here has been that if the economy proceeds along the path implied by our November 2003 inflation report projections, the MPC's repo rate will need gradually to rise to keep inflation in line with target.''

Meanwhile, the minutes of the MPC's January meeting revealed that policymakers perceived that domestic demand and growth in the world economy had already outstripped government projections, one of several factors that have markets now predicting a February hike.

Many economists felt January's no-movement decision was delaying the inevitable, and that it had more to do with the MPC grappling with the new inflation target.

The January meeting was the first since the chancellor of the exchequer switched the bank's mandate to hitting a 2% annual inflation rate, as measured by the harmonised index of consumer prices favoured in the eurozone. Previously, it had to target underlying retail price inflation of 2.5% on a UK measure which included more housing-related costs.

Meanwhile, the last hike

was designed to check the rise of consumer spending and growth in house prices.

The Nationwide, the UK's biggest building society, last week said house prices rose 0.7% in January - half the rate of December's increase - and with consumers' appetite for debt showing signs of waning during December with unsecured lending rising at its slowest rate for three years, it suggests that the November hike is having the desired effect.

However, Simon Rubinsohn, chief economist Gerrard, said the drop in unsecured lending could have been be a reaction to the November rise and the prospect of further increases this year - or it could just be a one-off during December.

Either way, most analysts said the figures were unlikely to have much impact on this week's MPC meeting.

Shaw added: ''I don't think the Bank of England will take too much notice of one month's figures, and the likelihood is that the MPC will raise rates again next week.''

That view is supported by the plethora of recent upbeat official figures. High street sales in December grew at their highest rate since May 2002, up 0.9% against the previous month's 0.1%.

The Office for National Statistics also estimated that gross domestic product climbed 0.9% in the fourth quarter of 2003 against the previous three months, its highest since the first quarter of 2001.

Surveys have further signalled improvements in sales and exports in manufacturing and services and in consumer confidence. The GfK consumer confidence survey last week showed a surprisingly robust increase for January as it rebounded to its highest level since November 2002.

Further, a recent survey by the Organisation for Economic Co-operation and Development showed the UK economy was growing faster than its European counterparts. According to the OECD, the UK fared

well in the face of a global downturn and is now well positioned to take advantage of global recovery.

The OECD also suggested the Bank of England gradually raise interest rates to promote balanced and stable growth.