Sir Eddie denies that rates will soon be on way back up

Sir Eddie George, the governor of the Bank of England, last night eased fears of early increases in interest rates to choke off Britain's consumer boom. He said that borrowing costs would rise only when the world economy recovered from recession and there was evidence that spending was failing to moderate of its own accord.

Speaking in Scotland, the governor said there was no imminent risk of the Bank raising rates and emphasised that without the policy of aggressively easing monetary policy last year the economy would probably have slid into recession.

"We have taken the view that unbalanced growth in our present situation is better than no growth - or, as some commentators have put it, a two-speed economy is better than a no-speed economy."

Money market rates in the City have been signalling a sharp rise in borrowing costs to 5.5% by the end of this year, with dealers expecting the monetary policy committee to take swift action to slow excess consumer demand.

However, Sir Eddie's comments, which follow a downbeat assessment last week of the prospects for the US economy by Alan Greenspan, chairman of the Federal Reserve, suggested that the MPC was in no hurry to tighten policy.

"At some point the world economy will begin to recover - indeed, there are some tentative signs that the US and euro zone economies are now beginning to bottom out, and that they could begin to pick up from the summer, perhaps to around trend by the end of the year.

"And the euro, which has been puzzlingly weak since soon after its introduction three years ago, still seems likely to strengthen eventually. When we reach that point - when it becomes clearer that the international environment really is improving and that external demand really is pick ing up - then we can look forward to better balanced growth in the economy."

When the outlook for exporters improved, the domestic economy would need to slow if a build-up in inflationary pressure was to be avoided.

"But let me make it quite clear: that's not a warning, still less is it a threat. It is quite possible that the necessary moderation - and I emphasise the word moderation - of consumer demand will come about of its own accord; given the gradual increase in unemployment we are currently seeing and the build-up of household debt, that would be the best possible outcome."

"But if consumer spending were not to moderate of its own accord we would clearly need at some point to consider raising interest rates to bring about that moderation. I do not suggest that the timing of any such move is imminent; that would obviously depend upon the timing and the strength of the pick-up in external demand."