16 October 2002, 08:59  Bank of England's George Signals No Reduction in Interest Rates

/www.bloomberg.com/ By Reed V. Landberg
London, Oct. 15 (Bloomberg) -- Bank of England Governor Sir Edward George signaled policy makers probably won't cut interest rates in coming months, saying a U.K. economic recovery is taking hold.
In a speech to business executives in Manchester, England, George said he expects a ``gradual recovery'' in Europe's second- largest economy, even for manufacturers who suffered their worst slump in a decade last year.
``There's no doubt these are challenging times for all of us,'' George said, according to a text of the speech. ``But that should not obscure the fact that in terms of the overall economy, including here in the Northwest, things are better than they've been in a long while.''
The comments were more optimistic than George's remarks a month ago in Birmingham, when he suggested the central bank was ready to cut rates again if the economy weakened. He added he maintained an ``open mind'' on whether rates should fall again. The central bank lowered its benchmark rate 2 percentage points last year to 4 percent, the lowest since 1964. That encouraged consumers to borrow and spend, keeping the U.K. from following the U.S., Germany and Japan into recession.
Britain's economy grew 0.6 percent in the second quarter after expanding 0.1 percent in the previous two quarters. That's faster than the expansions recorded in Germany, France and Italy.
Sustaining Recovery
As recently as August, the bank policy makers considered whether to start raising rates. George said the bank backed away from that line after world stock markets slumped, casting doubt on the durability of an economic recovery.
``One helpful consequence of this is that market interest rates have in fact fallen significantly, which will help sustain the recovery,'' George said.
The yield on the three-month Libor contract maturing March fell to 4.04 percent earlier today from 4.15 percent two months ago. The FT-SE 100 index of U.K. stocks has declined 21 percent this year and fell 9 percent in September alone. The Standard & Poor's 500 Index has slumped 24 percent this year.
George said he remained optimistic that both the world and the U.K. economies would enjoy a ``gradual recovery.'' He also noted that the drop in the stock market ``seemed to be largely unconnected to developments in the global economy.''
Instead, he said investors probably sold shares because of concerns about another terrorist attack, accounting failures in the U.S. and the possibility of war between the U.S. and Iraq.
Housing Prices
George said a decision to cut rates again would depend on whether the world economic recovery faltered and just how much the bank should stimulate consumer spending to compensate for weakness elsewhere in the economy.
Suggesting the bank would prefer not to cut rates again, he said the surge in housing prices is ``unsustainable.'' He also said there was little the bank could do to help manufacturers, who bore the brunt of last year's slump -- a theme he has discussed at times the bank is shifting toward considering higher rates.
On housing prices, which grew at their quickest pace in a decade in the year thorough September, George said that the bank's rate cuts are partly responsible for quicker growth.
``This is not without risks -- risks in terms of the build-up of household debt and of an unsustainable rate of increase in house prices, if not an actual bubble -- which, if persisted in for too long, or if carried too far, could lead to an uncomfortable retrenchment further ahead,'' George said.
As for manufacturers, George suggested industry should focus on improving its productivity to compete for a dwindling export markets instead of relying on the central bank for lower interest rates.
``Competition, at the national and international level, inevitably means expansion of some sectors of business at the expense of other,'' George said. ``It is a necessary driver of the increasing economic efficiency and higher sustainable growth that we need.''

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