Sir Eddie soothes rate rise fears

Sir Eddie George, the governor of the Bank of England, has soothed City fears that borrowing costs are to rise, shrugging off concerns about the strength of consumer spending and rising household debt.

After a weekend meeting of finance ministers and central bankers from the world's seven leading economies, Sir Eddie said that the Bank had cut interest rates seven times last year to encourage consumers to keep spending as the world economy turned down.

While the Bank believes consumers will eventually have to rein in their spending, Sir Eddie signalled that its rate setting committee is unlikely to opt for an immediate increase to encourage households to tighten their belts.

"There's no sense on the monetary policy committee that this has reached the point at which we should become immediately concerned."

His relaxed view was supported by the latest data from the CBI which showed pay awards easing in the first three months of the year. Their survey found deals in the manufacturing sector fell to an average of 2.3%, down from 2.9% in the last quarter of 2001.

"With pay increases now so low, we should see some of the heat taken out of consumer spending, giving the Bank of England the breathing space to hold rates at current levels," said the CBI's chief economic adviser, Ian McCafferty.

As the world economy picks up speed, financial markets in Britain are betting that the MPC will begin to raise rates quite soon, and quite aggressively, to rein in rampant consumer spending. But signals in recent weeks from Sir Eddie and the Bank's chief economist Charles Bean have suggested that the committee is still in no hurry.

Gordon Brown, the chancellor of the exchequer, said he was "cautiously optimistic" about the prospects for the British economy, the world's fourth largest. In his annual budget last week, he forecast that the economy would grow by up to 2.5% this year, slightly above the consensus of independent forecasters of 2.0%. In recent years, the Treasury has proved more accurate at predicting the UK economy than independent forecasters.

At the weekend's meeting of the IMF's main policy committee which he chairs, Mr Brown urged the Fund to adopt the same cautious approach to forecasting growth and export earnings in poor countries as the Treasury uses to predict Britain's public finances.

The Bank and the IMF have proved too optimistic in their assessment of how fast-developing countries will grow, undermining international efforts to reduce their debts to a sustainable level. Several countries which have received large-scale debt relief from the west are back in financial difficulties because collapsing commodity prices have eroded their export earnings.

G7 finance ministers and central bank governors issued a cautiously optimistic assessment of the world economy after their meeting, although they warned higher oil prices risked derailing the recovery from last year's slowdown.

"Economic recovery from the slowdown is under way, supported by appropriate and proactive macroeconomic policies that were in part a response to the tragic events of September 11, but downside risks remain, including those arising from oil markets," the one-page communique said.

Oil prices have surged in recent months as the situation in the Middle East has worsened, rising from below $17 a barrel to about $25.