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Wednesday, 26 June, 2002, 22:42 GMT 23:42 UK
Bank chief eases fear of UK rate rise
Sir Edward George
Sir Edward George: "There is little evidence of significant inflationary pressure"
The low rate of inflation, despite an "unsustainable" house market boom, has bought Bank of England chiefs time to assess whether a rise in interest rates is needed, Sir Edward George has said.

Sir Edward, the Bank's governor, raised concerns over the levels of consumer demand.


We can reasonably now look forward to more favourable offshore winds in the period ahead

Sir Edward George
The Bank would need "at some point" to raise interest rates, currently at their lowest level for about 40 years, if growth in consumption did not slow.

But the UK's current inflation rate - which, at 1.8%, is comfortably below a government target of 2.5% - gave the Bank breathing space to investigate whether much-heralded rate increases would really be necessary.

"There is little evidence at this point of significant inflationary pressure," Sir Edward said.

"That gives us a certain amount of time to assess the unfolding evidence."

Speculation

The speech, to an annual gathering of City leaders in Mansion House, followed considerable speculation that the Bank was poised to raise rates.

If followed an address in which Chancellor Gordon Brown signalled support for rate rises.

Earlier on Wednesday the US central bank, also facing scrutiny over when it might return to rate rises as the global economy strengthens, left rates on hold at 1.75%.

Wage data

Sir Edward credited the UK's low inflation rate largely to slow growth in earnings.

"Wage pressures in particular remain relatively benign, despite the robust labour market, " he said.

"It is crucial that that should continue."

Low wage pressures were helping offset fears prompted by factors such as the increases in house prices.

But he eased fears that the housing market was poised for early 1990s-style crash.

While members of the Bank's rate setting monetary policy committee agreed price rises were "unsustainable", Sir George added.

"It is less obvious that that necessarily applies to the present level of house prices, although of course it may."

Better prospects?

Sir Edward echoed Mr Brown's statement earlier of "cautious optimism" over the future of the UK economy.

The governor in part credited the weakening of the pound to its lowest level against the euro since October 1999.

"What has happened so far, taken together with the improved prospect for global demand, suggests that the adverse external factors weighing down on the UK economy over the past two years or so should now diminish," Sir George said.

"That offers the prospect of both stronger and more balanced demand and overall output growth."

He added: "After a difficult passage over the past 12 months, we can reasonably now look forward to more favourable offshore winds in the period ahead, opening the way to somewhat stronger and better balanced overall output growth, but with inflation remaining close to target."

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 ON THIS STORY
The BBC's Richard Scott
"There was a clear warning for anyone buying a house"
See also:

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