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George hint at slowdown offers hope on rates rise

Eddie George, Governor of the Bank of England, gave hope yesterday that the cost of borrowing will not climb any further by suggesting the economy might be starting to slow down - "as it needs to do, quite soon and quite quickly, if we are not to see inflation pick up".

His remarks came as an industrial survey claimed to show the economy was about to slow down - although the signs were inconclusive.

The British Chambers of Commerce survey showed both manufacturing and services reporting an increase in the balance of companies reporting higher deliveries and domestic orders.

Both sectors reported an increase in the difficulty of recruiting skilled labour, with 74 per cent of manufacturers and 64 per cent of service companies complaining about skill shortages.

On the other hand, the 100 companies surveyed had become more pessimistic, with expectations about sales and profitability during the next 12 months declining further. In services planned employment and investment also fell back sharply.

Ian Peters, deputy director general of the BCC, said: "This survey suggests the economy may now be at a turning point, and the Bank of England must take care to apply due weight to the economic expectations of the business community when making future decisions on interest rates."

However, the gloomier camp of City economists reckoned there was still not enough evidence to rule out a further increase in interest rates from the current level of 7.25 per cent, either next month or in March.

Mark Wall at Deutsche Morgan Grenfell said manufacturing was showing no sign of undue stress from sterling's strength and services were continuing to power ahead. "There is no sign of a sharp slowdown."

Richard Iley at ABN Amro said the forward-looking indicators suggested the economy would slow, but recruitment difficulties and pay pressures formed an inflationary "black cloud".

Analysts will look for more clues in today's official figures for GDP in the final quarter of last year.