By Stephen Cunningham
LONDON, Feb 19 - Bank of England Governor Sir Edward George warned financial markets on Tuesday they should not get too carried away with the idea that British interest rates are set to rise sharply this year.
George was speaking on the day that the Royal Institution of Chartered Surveyors (RCIS) reported a rapid acceleration in house prices in England and Wales last month.
He told the Euromoney Bond Investors' Congress too much weight should not be placed "on the steepness of the short-term interbank interest rate futures curve as an indicator of the likely course of official short-term interest rates -- at least in the UK".
"Our impression is that it includes quite a significant term premium," George added.
The market is currently predicting that interest rates, which were cut aggressively to a 38-year low of 4.0 percent last year as recessionary storm clouds gathered over the global economy, will be raised to around 5.25 percent by the end of 2002.
British gilts rose, and volatile interest rate futures pushed sharply higher, after the speech.
The June short-sterling interest rate futures contract rose 0.130 on the day to 95.600, indicating a rise in base rates to around 4.5 percent by mid-year. The December contract also rallied 0.120 to 94.930, suggesting rates around 5.0 percent by year-end.
The pound, meanwhile, was steady near its day's lows to the dollar at $1.4228 , while the FTSE 100 index showed a 35 point loss at 5,120 at 0959 GMT.

MONETARY POLICY LIMITATIONS
George said that although the sometimes large and unpredictable swings in interest rates of the past may now be consigned to the history books, monetary policy still had its limitations.
"Even if interest rates are to some degree less volatile, in a context of overall monetary stability, we certainly won't avoid sectoral imbalances such as we have seen over the past year or so..." he cautioned.
"Nor can we exclude policy failures in individual countries, which can, as we saw in the Asia crisis but happily not in the present case of Argentina, have wider repercussions," he added.
George's comments backed up a generally doveish inflation report from the central bank last week which attempted to calm fears over the need for higher rates to put a lid on price pressures.
However, on Tuesday, the RCIS reported signs that the housing market, a key inflationary factor in a country where most families own their own homes, was still buoyant.
It said that surveyors reporting price rises in the three months to January outnumbered those reporting falls by 46 in a hundred, up sharply from 29 percent in the three months to December. Economists have predicted last year's series of rate cuts would be quickly reversed in 2002 as the economy picked up to halt a runaway consumer boom in its tracks. While last year's rate cuts encouraged consumers to borrow and spend more to stop the economy from grinding to a halt, it also exacerbated domestic imbalances within the economy as manufacturing languished in the doldrums, hurt by the slowdown in world demand. But the MPC hopes consumer demand will slow of its own accord in coming months, without the need for the central bank to jack up rates sharply, a move which would raise repayments for heavily indebted consumers.