3 January 2003, 13:30  BOE's George Doesn't Expect `Sharp' Change in Rates

/www.bloomberg.com/ By Iain Rogers and Reed V. Landberg
London, Jan. 3 (Bloomberg) -- Bank of England Governor Sir Edward George signaled interest rates probably will remain at their lowest since 1964 for some time as the economy rebounds from last year's slump.
He held to the U.K. central bank's forecast that growth this year will recover to around 3 percent this year and that inflation will remain close to the government's 2.5 percent target.
``That's not something that implies a sharp change in interest rates in either direction,'' George said in an interview on the British Broadcasting Corp.'s ``Today'' program on Radio 4.
The comments suggest policy makers are unlikely to push for another interest rate reduction even after figures released yesterday suggested the U.K. economy may be faltering.
George dismissed as ``erratic'' a survey by the Confederation of British Industry showing retail sales fell in December for the first time in a decade.
Instead, he pointed to reports that department store and supermarket operator John Lewis Partnership Plc enjoyed ``a real takeoff'' in sales in the three days before Christmas, and that there was a 10 percent increase in the number of U.K. shoppers. He also noted the world economy will be helped by a gain in U.S. factory production rose in December.
`More or Less Correct'
``What the governor is saying here is that current policy is more or less correct,'' said Philip Shaw, chief economist at Investec Bank U.K. Ltd. ``The bank may need to tweak rates at some point but George doesn't see the need to shift them radically in either direction.''
The Bank of England has kept its benchmark lending rate unchanged at 4 percent since November 2001 when it finished a series of seven reductions that brought the key rate down from 6 percent.
Policy makers probably will wait until mid-year before raising rates, then push them to 4.5 percent before the year-end, economists surveyed last week by Bloomberg News predicted. Futures markets suggest rates may stay unchanged even longer. The yield on the three-month Libor contract maturing in December rose to 4.12 percent at 9:18 a.m. today from 4.10 percent yesterday.
George will leave the bank at the end of June when his second term finishes. Mervyn King, currently a deputy governor, will succeed him.
Europe's second-largest economy is growing faster than most European countries. Gross domestic product expanded 0.9 percent in the third quarter, compared with 0.3 percent in Germany and 0.2 percent in France. The lowest U.K. rates in four decades have spurred consumer spending and the biggest gain in house prices since 1989.
First Sales Decline Since 1992
The pace of expansion probably slowed last quarter, figures released yesterday suggest. Pre-holiday retail sales declined for the first time since 1992, according to yesterday's CBI survey. Consumer spending accounts for two-thirds of the economy.
``You shouldn't put too much weight on particular surveys at this time of year,'' George said. ``The expectation we have is still for a gradual moderation in consumer spending.''
Factories are struggling to recover from their worst slump since the last recession in 1991. Manufacturers including Marconi Plc, which makes mobile phone parts, and Corus Group Plc, the nation's biggest steelmaker, shed 161,000 jobs in the last year.
Shrinking Manufacturing
Manufacturing, which accounts for about a fifth of gross domestic product, contracted in December and orders dropped for the first time since July, a survey of 620 companies by the Chartered Institute of Purchasing and Supply showed yesterday.
U.K. central bankers have left borrowing costs unchanged for the past 13 months, declining to match half-point rate reductions last year by the U.S. Federal Reserve and the European Central Bank. The Fed reduced its discount rate to 1.25 percent on Nov. 6, and the ECB cut its rates to 2.75 percent on Dec. 5.
The average price of a home surged 29 percent in November from a year ago to a record 124,227 pounds ($195,300) after a 31 percent increase in October, according to HBOS Plc, the nation's largest mortgage lender. The gains in October and November were the strongest since house price growth last peaked in 1989. ``The rate of increase in house prices is clearly unsustainable,'' George said. ``We're anticipating quite a sharp moderation in the pace of increase, but not a generalized fall, over the next year or two.''
Britons are borrowing at record rates against the increasing value of their dwellings. So-called mortgage-equity withdrawal rose 10.6 billion pounds in April through June, Bank of England figures show. That was the highest value since records began in 1970 and up from 8.3 billion pounds in the first quarter.
British house prices have climbed more than those in the U.S., Germany and France since 1995 and will push inflation past the government's 2.5 percent target for much of next year, the Bank of England has said.
Chancellor of the Exchequer Gordon Brown has said policy makers want to avoid what he has termed a ``boom-and-bust'' cycle in the economy. Price growth peaked at 34 percent in October 1989 and fell for five years through 1995 after the government doubled interest rates to curb inflation.

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