Rate warning

Buoyant manufacturing activity in Europe and Japan is feeding inflationary pressures, underpinning expectations that official interest rates have further to rise.

A survey of 3000 euro zone manufacturers showed the sector growing at its fastest pace in nearly six years in June, with manufacturers charging customers more as rising oil prices and supply shortages in raw materials pushed up their costs.

A companion survey of British manufacturers also showed faster business growth and strengthening price pressures, boosting market expectations of an interest rate hike before the end of the year.

In Japan, the central bank's survey showed a tightening labour market and large companies making their most ambitious capital spending plans in 16 years, feeding expectations the Bank of Japan will raise interest rates soon after more than five years of holding them close to zero.

The US Federal Reserve has already lifted its benchmark rate to 5.25% from just 1.0% two years ago, and US manufacturing surveys are being closely scrutinised for any signs that a further rise might be justified.

In the euro zone, the RBS/NTC Eurozone Purchasing Managers' Index rose to 57.7 in June from 57.0 in May, its highest level since August 2000 and well above the 50 mark that separates growth from contraction.

Showing growing confidence that demand for their goods would allow them to pass on increased costs, manufacturers expanded their workforces and raised their factory gate prices at the fastest pace since that data series began in late 2002.

British economists are less certain about the next change in Bank of England rates, which the central bank cut to 4.5% last August. But a Reuters poll last week showed a slim majority expect a rate rise early next year.

A recent British manufacturing survey showed the sector growing at its fastest pace in almost two years in June and sharper rises in both raw material and output prices.