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Last Updated: Wednesday, 27 June 2007, 12:33 GMT 13:33 UK
Rates too low, Bank deputy says
Bank of England
The Bank is expected to raise rates at its next meeting
UK interest rates are too low and are helping to drive demand for loans and credit, Sir John Gieve, deputy governor of the Bank of England, has said.

Speaking in Guildford, Surrey, Sir John explained why he was one of four rate setters who voted to raise interest rates at the Bank's last meeting.

Rates are at 5.5%, their highest in six years as inflation has quickened.

However, business leaders warned that consumers were already feeling the pinch as retail sales growth slowed.

According to the Confederation of British Industry, its latest retail sales survey had a reading of 17 in June, down from 31 in May.

That was the lowest reading since November, and came as poor weather also kept people away from shops and retailers.

"This survey shows consumers are reining in their spending in response to higher borrowing costs," said John Longworth, head of the CBI's survey panel.

'Sharper slowdown'

Many analysts are forecasting that the Bank will raise interest rates to 5.75% next week, after holding them in June.

Some analysts predict that interest rates will hit 6% by the end of the year. One of the main forces behind price growth has been the low cost of loans and debt, which has helped to finance spending by consumers and companies.

"I voted for a further increase earlier this month partly because I was not convinced that current rates would be sufficient to bring credit growth and nominal demand back to their long-term sustainable path," Sir John said.

UK interest rate graph

"I also felt that the impact of moving too slowly on the credibility of the regime and thus the future prospects for the economy was of greater concern, given the robust rate of growth, than an unnecessary slowdown in activity," he added.

Sir John noted that there was a risk that "we may increase interest rates too fast or push them up too far, with an unnecessary loss of growth".

However, he also warned that "we may raise rates too slowly with a cost in higher inflation and potentially higher interest rates and a sharper slowdown in the end".

'Nervous market'

Meanwhile bank Northern Rock said there was "an adverse interest rate environment".

The comments by the UK's eighth-largest lender sparked fears that other banks also would feel a rate squeeze.

Northern Rock's shares were 97 pence lower at 850.5p during morning trading in London.

"Today's effective profit warning, which has battered the share price in an already nervous market, could hardly have come at a worse time," said Richard Hunter of Hargreaves Lansdown Stockbrokers.

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