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Tuesday, 26 November, 2002, 13:50 GMT
UK rates 'unlikely to fall further'
Bank of England Governor Sir Edward George
Sir Edward expects the UK housing market to cool
Bank of England chiefs have indicated that UK interest rates are unlikely to fall further in the current rate cycle.

The comments came as the Bank's Governor Sir Edward George and Deputy Governor Mervyn King were quizzed by the Treasury Select Committee.


Whatever the justification for the change in the fire service... there will be a kind of tendency to say if it's good for them, why are they a special case, we do just as important a job

Sir Edward George, Bank of England Governor
Mr King said it was a "reasonable" view to assume rates had hit a low, assuming the world economy recovered in line with expectations.

And the Bank's governor, Sir Edward George, warned that the firefighters pay settlement could lead to inflationary pay settlements elsewhere in the public sector.

In other questioning, Sir Edward said that house price rises would slow, and possibly fall in some areas, over the next couple of years.

Rates set to rise?

Earlier this month the Bank of England's interest rate-setting committee - the monetary policy committee (MPC) - left UK rates unchanged at 4% for the 12th month in a row. The Bank's deputy governor Mervyn King told the Parliamentary committee said rates were unlikely to go any lower if the global economy recovered in line with the Bank's forecasts.

But MPC member Christopher Allsopp - who voted in favour of a rate cut at the last MPC meeting - said he still thought rates would have to come down if the Bank was to hit its inflation target.

The Bank has a target for underlying inflation of 2.5%, although it is allowed to under or overshoot the target by one percentage point.

Housing boom ending

The Bank governor said he thought the housing boom would begin to cool.

"My view is that we will see house price increases for a while and then moderating to zero, or maybe minus a bit in some parts of the country in the next couple of years," Sir Edward told the committee.

"What we are not saying is that house prices are about to crash," he added.

In previous statements, the Deputy Governor, Mervyn King, had excited alarm by warning that there was a significant risk of sharp collapse in house prices.

Pay pressures

With firefighters in the middle of an eight-day walkout over pay claims, Sir Edward warned that big pay rises in the public sector could fuel inflationary pressures.

"Whatever the justification for the change in the fire service... there will be a kind of tendency to say if it's good for them, why are they a special case, we do just as important a job," he said.

"You get a generalised cost-pushing inflation starting with the public sector."

But Sir Edward noted that higher government spending on the public sector in general had come at an opportune time.

"It's rather fortunate that the public sector is expanding in this environment... particularly with downside risks to consumer spending, public spending is clearly a support."

Will the UK economy feel the impact of the US slowdown?

Economic indicators

Analysis

UK rate decisions
See also:

20 Nov 02 | Business
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