George sees growth rate slowing

  • @dusborne
Expressing confidence that Britain's rate of economic growth is moderating, Eddie George, the Governor of the Bank of England, hinted clearly at the weekend that he does not expect interest rates to rise much further.

Attending a meeting of Group of Seven finance ministers and central bank governors in Toronto, Mr George said that early action by the British authorities to tighten monetary conditions had meant that earlier fears of resurgent inflation expressed in themarkets had been overstated.

The half-point increase in British rates on Thursday, to 6.75 per cent for the bank base rate, marked the third such increase since last September.

The United States also raised rates by half-a-point on Wednesday last week.

Pointing to a turnaround in expectations with regard to both inflation and interest rates in Britain, Mr George said: "The markets were exaggerating the likely extent of inflation and the extent of the rise in interest rates to keep it on track."

Looking back to the first interest rate increase in September, he said: "Since we started, the implied peak in interest rates in the long end of the money markets and the bond market is now lower. That is reflected in the perception that by moving early we will keep the thing under control and that in the end have to do less. That is my belief."

Among all the Group of Seven ministers, there was a tangible atmosphere of self-congratulation that, in spite of surging growth in many of their countries, inflation appeared to be largely under control.

Kenneth Clarke, Chancellor of the Exchequer, said: "I think we are on the route for suststained growth while we all seem to be in control of our fiscal positions and of inlation."

Separately, the latest analysis from Henley Centre forecasts that the weakness of the British housing market will keep inflation under control without any further significant increases in interest rates this year.

The centre forecasts that house prices will rise by just 0.3 per cent in 1995, and that weakness in new mortgage lending will persist.

It expects interest rates to rise by only another half-point over the rest of the year, ending 1995 at 7.25.

The centre said there was a clear link between house prices and consumer spending. With house prices depressed and mortgage rates rising, real mortgage rates would stay strongly positive for some time. This would keep growth in consumer spending down to 2.3 per cent this year and below 3 per cent to the end of the century.