NORTH-East manufacturers are cautiously optimistic - but energy costs are continuing to bite, a member of the Bank of England's influential rate-setting committee said last night.

David Walton, who sits on the Bank's Monetary Policy Committee (MPC), which meets to set interest rates each month, was on a fact-finding mission to the region yesterday.

He said the manufacturers he had met during his tour were predicting an upturn in orders, but were uncertain of the reason for the revival in the sector.

Mr Walton's visit came a day after the Bank of England said it would miss its key inflation target if it failed to act on interest rates within the year.

Last night, he was giving nothing away, insisting that the MPC decided on interest rates in its monthly meetings and never before, but indicated that he thought inflation would rise above the two per cent target in the short-term, due to higher energy costs, but would slump back by the end of the year.

This fitted in with analysts' predictions yesterday of an interest rate rise upwards of its current 4.5 per cent in November.

Yesterday, Mr Walton, who was visiting Piercebridge, near Darlington, Stockton, Bishop Auckland, Cramlington and Newcastle yesterday and today, said: "It was quite encouraging among manufacturers to see how much more upbeat they have become very recently.

"They have seen quite a notable improvement in their order inflow, from both domestic and international customers, and that matches the national picture."

However, he said high energy costs, and the skills issue, were at the top of most businesses' grievance list.

But the economy in general was looking much brighter than this time last year.

"I think we have a clearer picture of the economy than we did a few months ago," he said. "Through the first half of last year, it was very weak, but things did pick up in the second half, and by the final quarter it seemed to have got back towards its long-term growth rates.

"I think that we have more confidence, that the recovery is established, and that the economy will continue to grow at close to its target."

* Hopes of a long-awaited recovery for the manufacturing sector were lifted yesterday following its best performance for almost a year in March.

The Office for National Statistics (ONS) said manufacturing output rose 0.7 per cent in March, after a 0.1 per cent fall in February. That was more than three times higher than expectations in the City and the strongest rise since April 2005.

Alan Hall, regional secretary of the manufacturers' organisation EEF Northern, said the positive trend and optimism was being seen in the North-East. He said: "There is a real buoyancy around in the manufacturing sector and real opportunities presenting themselves."