Bank accused of errors on interest rates

Too little, too late, says Item Club
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THE STEAM has not gone out of the consumer boom, according to a forecast of the economy published today. The Bank of England has done too little, too late, to slow consumer spending, and the penalty will be paid by manufacturing industry as a result of the strong pound, it says.

This thumbs-down for the Bank's interest rate policy comes from the Item Club, which uses the Treasury's computer model of the economy. Peter Spencer, economics adviser, said the 1.25 per cent rise in the level of interest rates since last May had had virtually no effect on consumers because long-term interest rates and mortgage costs had fallen.

"You and I can borrow money more cheaply than Gordon Brown," he said, noting that fixed rate mortgages were currently available at interest rates of below 6 per cent. Three out of every five new mortgages are taken out at fixed rates.

In a special study of the housing market he predicts a big rise in the number of home sales, and a rise of 8 per cent in house prices this year. The report argues that the need for a further rise in interest rates could not be ruled out.

The Item report says the Bank's failure to raise rates earlier, and the Chancellor's failure to hit consumers with higher taxes, has resulted in the pound being so strong. While that has not dented exports yet, it will push manufacturing into recession, as official figures due today are likely to confirm.

Coping with the high exchange rate will result in the loss of 5 per cent of all jobs in manufacturing, the report predicts. That will eventually translate into rising unemployment, up to 1.5 million next year from 1.3 million now, and a slowdown in consumer spending.

The burden is unlikely to be shared evenly between industries. The forecast notes that high value sectors such as pharmaceuticals and software have proved remarkably resilient since the pound started its climb, meaning low-value industries will bear the brunt of the adjustment.

This uneven picture will be corroborated by research due to be published in the Bank of England's Quarterly Bulletin on Wednesday. It shows that a handful of industries, including pharmaceuticals, aerospace, computing and electronics, account for the vast bulk of productivity improvements in manufacturing since 1970.

Their total productivity grew at rates of 3 per cent to 6 per cent from 1970 to 1992, compared with an average of 1.4 per cent for manufacturing as a whole. Just seven industries accounted for 95 per cent of the increase in the productivity of British manufacturing during this period.

The Item forecast, sponsored by the accountants Ernst & Young, predicts the balance of payments will be pounds 11bn in the red next year. Mr Spencer said: "We now have a rudderless economy."

Gordon Brown, speaking yesterday on the BBC's Breakfast with Frost programme, said: "The economy will have to slow down a little to enable us to get to a path of sustainable growth, and that is what I am trying to do."