A JANUARY increase in interest rates looked ever more likely this week as a new survey showed Britain's manufacturing economy raced ahead at its fastest pace for more than three years in December.

Just a week before the Bank of England holds its first meeting in 2000 to set the cost of borrowing, a survey showed manufacturers experiencing strong growth in demand, especially from the UK.

The Chartered Institute of Purchasing Managers' index for manufacturing, in which any figure above 50 indicates expansion, rose to 56.1 from 54.7 in November.

Much of the improvement came from domestic growth.

Overseas orders, while still ahead, were hampered by the strong pound.

Demand for goods during the millennium period are thought to have created some of the improvement.

Geoffrey Dicks, economist at investment group Greenwich NatWest, said: "It is difficult to disentangle one-off Y2K effects from the underlying position but the latter certainly looks robust."

New orders placed with manufacturers hit 60.3 - its highest level since July - but employment levels contracted in December.

l Researchers at The Centre for Economics and Business Research have predicted British economic growth will hit 2.6 per cent this year and three per cent in the likely election year of 2001.

CEBR researchers forecast interest rates would reach a peak of eight per cent by 2002, their highest since the autumn of 1992 after Black Wednesday.

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