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Thursday, 13 June, 2002, 13:33 GMT 14:33 UK
Bank warns of higher interest rates
Sir Edward George
Sir Edward George: Stark warning on higher rates
The Bank of England has given its clearest indication yet that interest rates are likely to rise from their historic low of 4%.

The Bank's governor, Sir Edward George, told the Treasury Select Committee that the bank would have "no option" but to raise rates if the economy did not slow down.

"If it doesn't happen that domestic demand slows, and the external situation picks up, that's when it would generate inflationary pressures.

The longer house price rises go on, the longer will be the likely adjustment

David Clementi, deputy bank governor
"At some point we will have to moderate the rate of growth of domestic demand," he said.

Official figures show that the UK economy was not growing at all during the first three months of the year, but the governor expressed scepticism about these figures and suggested that they would soon be revised upwards.

"We thought we would have seen positive growth... they are subject to revision, and we expect this would be in a positive direction," he commented.

Clash with MPs

There was an extraordinary clash with MPs when the deputy governor of the Bank, Mervyn King, was accused of moderating his position on inflation in order to become the next governor when Sir Edward's term expires next year.

Liberal Democrat MP David Laws asked if Mr King had changed his vote, and also accused Mr King of misrepresenting the committee's views at the press conference following the publication of the Bank's May inflation report.

Sir Edward George interrupted: "This is an extraordinarily cheap remark."

Mr King said: "I give you a total assurance. The cynicism of politicians is not necessarily something you should attribute to others - and I look forward one day to an apology."

House price fears

Among the signs worrying the Bank are strong domestic demand are the growth of retail sales, the large increases in consumer debt and the strong housing market, with house prices rising at an annual rate of 18%.

Other bank officials warned that the current rate of increase of housing prices was not sustainable.

"The longer it goes on, the longer will be the likely adjustment," said deputy bank governor David Clementi.

And he warned that if the high levels of borrowing continued, the adjustment could be "quite severe".

However, the bank is hoping to avoid a boom-bust in the housing market similar to that in the late l980s, when house prices actually fell, causing negative equity and big increases in repossessions for highly leveraged borrowers.

Sterling dilemma

Sir Edward said he was not worried by the rise of the euro against the dollar, which was also weakening sterling.

He said that unless sterling fell against a wide basket of currencies, there would be a limited effect on the exchange rate.

Instead, sterling was rising against the currency of the US, which is one of the UK's biggest trading partners.

Manufacturers have long complained that the high pound was hurting their exports by making them too expensive.

But the governor said that a weaker pound would not be enough to redress the imbalances in the economy.

The Bank has worried for some time about the dual economy, with a booming consumer sector and a weak manufacturing sector.

But deputy governor Mervyn King pointed out that the growth rate of domestic demand would have to be cut in half in order for the economy to return to balance.

See also:

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