INTEREST rates look set to rise after new figures showed the manufacturing sector was heading out of recession.

The Office for National Statistics said manufacturing output rose 0.8 per cent in April, the biggest rise for eight months.

Ten out of 13 sectors saw improvements in output, with the beleaguered hi-tech industry reporting some of the most significant gains.

Computer manufacturers reported a 3.1 per cent jump while the semiconductor sector saw a 5.4 per cent surge.

Industrial production, which includes energy output and mining, was up 1.1 per cent on the month - the strongest rise since July 1999.

And in separate figures the ONS showed the UK's balance on trade in goods and services narrowed in April, from a revised £2bn deficit for March to a provisionally estimated £1.6bn deficit.

The global trade deficit was £2.4bn, better than many had forecast, and the ONS said the trend estimate suggested the UK trade deficit was narrowing.

But while the data is good news for the UK economy, most agree it now means a hike in the cost of borrowing is imminent.

The Bank of England's Monetary Policy Committee, which meets in July, slashed interest rates to a 38-year low in 2001 to ward off the global economic slump.

But today John Butler, economist at HSBC, said: "April saw the first official sign of recovery in manufacturing output.

"In addition, revisions to industrial output and the trade data in the first few months of the year point to a probable upward revision to first quarter GDP. These together have increased the likelihood of a rate rise at the July meeting.

Last month, economists were shocked when the ONS said manufacturing output slumped 0.8 per cent in March, contradicting anecdotal evidence about the recovery.

But today's hike was bigger than expected and the ONS has revised last month's fall to 0.5 per cent.

Philip Shaw, economist at Investec, said: "We have never really believed that the sector had been as weak as the previous figures had suggested and are of the view that this report marks an official turning point.

"Even if manufacturing output were to remain flat in May and June, this would mark the end of the sector's five quarter recession."

Mr Shaw said he was now "even more convinced" the MPC would raise rates when it next meets.

Interest rates have been left on hold this year as conditions around the world tentatively improve.

Any hike would be the first since February 2000's quarter-point rise to six per cent.