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Wednesday, November 3, 1999 Published at 01:11 GMT

Business: The Economy

Bank weighs rate rise

Independent members of the MPC want a bigger say in research

The Bank of England's Monetary Policy Committee is due to give its decision on interest rates, with most analysts expecting a small rise.

Since the Bank of England last raised rates at its September meeting to 5.25%, more signs have emerged of the strength of the UK economy.

The BBC's Liz George: "It is a row being fought very publicly"
In addition, other central banks around the world - most notably in the United States and Europe - have signalled that they are likely to raise their interest rates soon.

Last month, the MPC voted to keep rates on hold - but warned it was waiting for more economic evidence to emerge.

Controversy over independent role

But the meeting has been overshadowed by a growing controversy over the role of the four independent members of the MPC.

The four who are not bank employees - including Professor Charles Goodhart, DeAnne Julius, Willem Buiter, and Sushil Wadhwani - have complained that they are not able to receive independent advice from the Bank's economists.

But the Bank's deputy governor, Mervyn King, insists that they should not have the right to directly instruct the Bank's staff.

The controversy is linked to differing policy positions, with many of the independent members more willing to "give growth a chance" before raising interest rates again.

They argue that, with the economy still recovering from output lost during the last slowdown, there is no inflationary danger.

And they suggest that the economic models developed in the l970s and l980s may understate the degree to which the economy has modernised and is now less vulnerable to inflationary pressures.

The dispute threatens to undermine the credibility of the MPC itself as an objective policy-setting body, a key reason it was established in the first place.

Signs of strength

In the last few weeks, government figures showed a strong economic recovery in the three months between July and September, with an annualised growth rate of 3.6%.

In addition, house prices surged in October by 2.8%, their fastest rate since the l980s, according to the Halifax house price survey.

The Chancellor, Gordon Brown, has said he would support any decision by the MPC to raise rates in order to curb inflationary pressures. But he is determined not to intervene in the controversy between MPC members, fearing that any move would undermine their claims of independence.

Hawks abroad

Meanwhile, the European Central Bank - which sets the interest rates for the 11 countries of the euro-zone, has given its clearest signal yet that it is considering a rate rise too.

"Our tendency toward higher interest rates has certainly increased somewhat since July," ECB President Wim Duisenberg said on Tuesday.

The ECB is believed to be concerned that its monetary measures of inflation are accelerating as the European economies pull out of recession.

"The members of the governing council have so clearly positioned themselves that a rate move seems unavoidable," said Ulrich Kater, economist with DGZ-DekaBank in Frankfurt.

Interest rates in the euro-zone are 2.5% after the ECB cut rates in April.

All eyes on the Fed

And Alan Greenspan, head of the Federal Reserve, warned bankers that he was worried about rising house prices as well as the booming stock market. He said that equity withdrawal from the housing market was fuelling consumer spending at a higher rate than stock market prices.

The Fed, which has already raised interest rates twice this year, says it has a "bias to tighten" - meaning that when it next changes interest rates, that move will be upwards.

Analysts are divided on whether the Fed will move again when it meets on November 16, or wait until after the millennium bug worries are over in January.

In some sense, all three central banks are watching each other, convinced that rates will have to go up again but reluctant to take the blame for making the first move.

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