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Wednesday, August 12, 1998 Published at 11:14 GMT 12:14 UK

Business: The Economy

Bank wrestles with rates

Inflation still a risk for the Bank of England

The Bank of England's Monetary Policy Committee voted unanimously to keep interest rates on hold last month, but warned that more rises could not be ruled out.

The minutes of the committee's July meeting showed that the nine members voted unanimously to make no change to the 7.5% base rate.

But the Bank cautioned that it would be dishonest to assume that rates could only go lower.

Releasing its quarterly inflation report, Bank Deputy Governor Mervyn King said: "It would be dishonest of me to pretend that I can give you an assurance that interest rates will only head down."

Pressures easing?

Analysts said the relatively benign outlook suggested that pressure to raise rates was easing.

Jeremy Hawkins, economist with the Bank of America said the decline in average earnings and the minutes from the July MPC meeting would "add to the impression that UK interest rates have reached the peak."

The Bank of England surprised markets when it voted to increase interest rates in June by 0.25%. But it has now made no change for the last two months.

[ image: Willem Buiter was less of a
Willem Buiter was less of a "hawk" last month
The MPC has responsibility for keeping inflation in check - with a long-term target rate of 2.5%.

The minutes from the July meeting show that the committee believed domestic demand was slowing and the slowdown was spreading to the service sector.

Manufacturers have been complaining of weak demand for their products at home and abroad for some months.

But the committee said it was too early to tell whether earnings growth was slowing, thus reducing inflationary pressures.

Earlier today official figures showed that wage growth slowed in June to 5.0%, down from 5.4% in May.

Spending risk

The committee also warned that the recently announced government plans for a big increase in spending in the next three years would add to pressures for a rate rise.

"The case for a reduction in interest rates had become less clear in light of the government's recent announcements on fiscal strategy, which raise new concerns about the medium term inflation outlook.," it said.

Inflation is a greater risk than recession, according to the Bank.

Deputy governor Mervyn King said there was only a one-in-eight chance of the economy entering a recession next year if policy remains unchanged, while there was a one-in-three chance of missing the inflation target.

The Bank said that the main risks to inflation were increases in wages and the fall in sterling, which would raise the cost of imported goods.

The Bank says it expects sterling to fall in value, especially in relation to European currencies.

High interest rates have, up until now, kept up the value of the pound.

The Bank said economic growth was slowing, but it warned that after six years of expansion, the build-up of tight labour markets and capacity constraints could lead to a temporary rise in inflation.

However, it said it was confident that it would still hit its medium term inflation target of 2.5% within the next two years.

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