Cool it, Sir Eddie tells rate markets

The governor of the Bank of England, Sir Eddie George, yesterday moved to calm City speculation that interest rates are about to rise.

Since inflation surged above the government's 2.5% target in January, the interest rate futures market has been pricing in a rate increase as early as next month. But Sir Eddie warned a City audience at the Euromoney Bond Investors' Congress to take its predictions with a pinch of salt.

Sir Eddie took advantage of the ceremony, at which he picked up a lifetime achievement award, to deliver a "cool it" message to the markets.

"If I could make just one comment on the macroeconomic situation... it would be to caution you against placing too much weight 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."

Analysts said Sir Eddie was keen to dispel the assumption that in the light of last week's strong inflation figures, the only way for interest rates to move was up.

"He's trying to calm everyone down a touch," said Simon Rubinsohn of City broker Gerrard. "He's a bit worried there are still deflationary pressures around. I'm not completely convinced that interest rates are at a turning point yet."

Rates were cut seven times last year to stave off the worst effects of the global slowdown, but the continued strength of consumer demand and the build-up of household debt has led to increasing speculation over recent weeks that rates will rise, perhaps as early as the next meeting of theBank of England's monetary policy committee, in March.

However, some commentators suggested yesterday that Sir Eddie's steer could be an indication that he is against an early rise. "This could mean that he's not willing to vote for a rate rise any time soon," said Danny Gabay of JP Morgan.

The markets shifted their assessment of the likely pace of rate rises after the governor's comments, and by yesterday afternoon they were betting on an increase of about 1% by the end of this year.