Rate rise looks a certainty as economy continues accelerating

Rate rise looks a certainty as economy continues accelerating

The Treasury dropped the strongest possible hint yesterday that it expects the Bank of England to raise interest rates next month, after official data showed the economy grew above trend for the fourth consecutive quarter.

Confounding fears that the economy had slowed in recent months, the Office for National Statistics said expansion in the quarter ended in September was 0.7%.

Ed Balls, the economic secretary to the Treasury, responded by warning of the risks of inflation: "With the economy growing more strongly than expected and with upward pressure on global commodity prices, we must all remain vigilant. We need continued discipline in wage-setting and pay bargaining across the private and public sectors."

A Treasury source said Gordon Brown would support the Bank in any difficult decision it might need to make - the code used by the government to signal support for a clampdown.

The ONS data showed growth in the year to the third quarter of 2006 was 2.8%, the fastest rate in two years. City analysts said annual growth looked set to exceed the forecast of 2-2.5% set by Mr Brown in the budget and that a quarter-point increase in interest rates to 5% next month was a formality. The City consensus had been for growth to slow to 0.6% in the third quarter.

A breakdown of the ONS figures showed the service sector grew by 0.8%, slightly weaker than the previous quarter, counterbalanced by manufacturing's 0.7% growth - its best figure.....continued below

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in two years. The economy has expanded by 0.7% in each of the past four quarters, a pace the Bank believes is faster than the economy can sustain for long without stoking inflation.

Although the annual growth rate of 2.8% was still below the Bank of England's forecast of just over 3% made in the August inflation report, analysts said the shortfall was insufficient to deter the Bank from raising rates to 5%.

Rates were left on hold in September and this month. However, recent rises in consumer price inflation and high street prices suggest that retailers and businesses are seeking to pass on the burden of higher costs.

The Bank's governor, Mervyn King, has expressed concern recently over earnings growth that sought to compensate for the effects of higher energy prices.

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