BoE says rates may need sharp rise

Eddie George, Governor of the Bank of England, warned the Chancellor of the Exchequer last month that interest rates would have to rise more sharply in the new year if he did not increase the cost of borrowing straight away.

Mr George's forthright advice, in minutes of the monetary meeting on 11 December published yesterday, revealed the split between him and Kenneth Clarke to be wider than anyone had expected.

According to the minutes: "The Bank was fairly confident on the basis of the present evidence that interest rates would need to rise, certainly by 0.5 per cent, in the next few months." If rates were not raised a quarter point in December, they continue, "the Bank would need to advise a half per cent move in either January or February".

City experts said yesterday they expected the Bank of England would advise Mr Clarke to increase the cost of borrowing after next Wednesday's meeting, even though recent figures have given the Chancellor more ammunition to resist.

"The Governor cannot be as vocal, but I cannot see him going back on his recommendation," said David Walton, an economist at investment bank Goldman Sachs. He pointed out that even though many commentators thought Mr Clarke had been right in May 1995, the last time he ignored such strong advice from the Bank to tighten policy, inflation had not reached its target 18 months later.

A survey published yesterday gave Mr George extra backing. Business Strategies Ltd, a consultancy, predicted that consumer spending would grow 4.5 per cent this year, the highest since the recession. The pace at which consumer confidence was increasing had slowed down since the previous quarter, but David Fell of BSL said: "Most people across the country have a pretty robust view of economic prospects."

The survey showed that concerns about unemployment had receded, especially in the South-east, Midlands and Yorkshire and Humberside, but consumers were more worried about inflation.