George sees second year of firm growth: Governor hopes any future interest rise will be received favourably

Click to follow
The Independent Online
EDDIE GEORGE, Governor of the Bank of England, yesterday held out the hope of two unbroken years in which economic growth would outstrip inflation, providing a strong basis for a sustained expansion.

In his speech to the Lord Mayor's dinner at the Mansion House, the Governor said there had been only 12 years since the Second World War in which growth had exceeded inflation - and only four since 1970.

'It is a realistic hope that next year I will be able to report on a second consecutive year of growth above the rate of inflation,' he said. But with an increase in interest rates inevitable, Mr George said he hoped it would be regarded positively 'as a considered response to the underlying strength of the economy, and to the prospect for inflation in the medium- term, and not as evidence of weakness'.

In a clear rejection of the monetary policy-making of the 1980s, Mr George said policy was intended to maintain the expansion at a sustainable pace. Raising rates should not be left so late that 'the economy is brought to a juddering halt by a much larger interest rate rise than would otherwise be needed'.

Mr George also dismissed the idea that a successful monetary policy could be judged in terms of low rates or how long they could be held down. Instead, policy should be measured against the success in achieving and maintaining price stability.

Mr George indicated that the Bank of England was taking a similar approach to fighting inflation as the US Federal Reserve.

Interest rates would be raised not only to moderate upward pressure on prices but to 'pre-empt the emergence of associated cost and price pressures', he said.

The Governor nevertheless found overall economic prospects encouraging. An improving world economy and the recent accord on world trade provided a more favourable global backdrop.

Speaking to the same audience, the Chancellor, Kenneth Clarke, said yesterday's fall in unemployment was largely due to the deregulation and trades union reforms of the 1980s.

He said Britain had carried out virtually all of the recommendations on making labour markets more flexible contained in the recent Jobs Study by the OECD.

View from City Road, page 35

Comments