Bank chief warns of rate rise ahead

Eddie George, Governor of the Bank of England, has warned that interest rates will have to rise early next year to counter inflation.

In an interview with Le Figaro he also spoke of worries about the single European currency, saying conflict among member states over interest rates could cause tension which would weaken the euro. But the British economy was showing solid growth, with unemployment falling and inflation at its lowest for a generation. "In order to contain this growth, it will be necessary, sooner or later, to increase interest rates."

His words will give little comfort to John Major as he prepares for an election in which he wants to make the economy the key battleground. And his warning about inflation is likely to irritate the Chancellor, Kenneth Clarke.

The basic rate for bank borrowing was raised in October by 0.25per cent to 6 per cent as the Bank and the Chancellor sought to slow the economy to keep the Government on target for an inflation rate of 2.5 per cent. In November the Bank's quarterly inflation report said more rises would be necessary but Mr Clarke's Budget staved off rises before Christmas.

The City and the Confederation of British Industry agree rates must rise before the election. Britain will know by spring 1998 whether it will participate in the single currency. Mr George insisted EMU must ensure price stability to establish its credibility.

"The whole question is whether or not the single interest rate, which is at the heart of the system, suits the macro-economic situation in each member country without creating tension. If this be the case, then the euro will be a `strong currency' but, if for domestic reasons a member- state wants to have a high interest rate, and another wants a low interest rate, then tensions will appear.

"A compromise will therefore have to be found. And if this is done by giving way to the demands of countries wanting the lowest possible interest rate, then the euro will be a weak currency." Mr George also warned against massaging national accounts to meet single-currency qualifying conditions.