Confidence hits seven-month high

THE Bank of England's aggressive interest rate cuts have boosted consumer confidence to a seven-month high and helped ward off the threat of a deep recession in the UK, say studies out today.

Consumer optimism has returned to levels not seen since early last summer, before the Russian debt default triggered crisis in the financial markets, according to the latest GfK consumer confidence survey.

The market research company GfK found that confidence about personal finances hit an all-time high this month, while the survey's benchmark confidence barometer, published monthly on behalf of the European Commission, increased to -1 in February. This is up from -3 in January, and well above its autumn low of -9.

The Bank of England's decision to cut interest rates by a further 0.5 percentage points earlier this month "undoubtedly contributed to the increase in confidence", GfK said.

However, confidence remains substantially below levels seen in late 1997 and early 1998, with fears of unemployment weighing heavily on consumers' minds.

Many view the recent fall in official unemployment measures "with scepticism", GfK said, and 53 per cent of people surveyed said that unemployment would rise this year.

A separate survey by Barclays also paints a bleak picture, with growth expected to grind to a halt this year. Barclays predicted the economy will stagnate, and could even contract, in the first six months of the year.

The bank's forecast of no growth at all in GDP this year is markedly more pessimistic than the Government forecast, which predicts GDP growth of 1 per cent to 1.5 per cent. Over the longer term, however, Barclays is more upbeat, predicting a bounce back in growth in 2000.

The Bank of England's sharp reduction in interest rates over recent months has substantially reduced the chances of a deep recession, Barclays said.

Meanwhile, the independent Economic Research Council has written to the House of Lords' Monetary Policy Committee challenging the notion that interest rates are the most effective tool of demand management.

It said: "There are many who harbour serious doubts as to whether current British understanding of interest rates, and policies towards them, are logically watertight."