World's bankers weigh deflation threat

Basel Talks: Sir Edward George takes his last bow in the shadow of concerns over global economy

Global deflation fears are set to dominate Sir Edward George's last day as Governor of the Bank of England. He has been attending the annual meeting of the Bank for International Settlements in Basel, Switzerland, which ends today.

"The issue is really how to produce growth in the economy and cope with the excessive disinflationary patterns which have appeared in many countries," a central bank official in Basel said yesterday. "There should be a discussion about strategies on how to prevent deflation and how to cope with it."

In what will be seen as a downbeat end to his 10-year reign at the Bank of England, Sir Edward admitted that the best hope was for "a gradual sluggish pick-up across the world moving into next year".

He has been more optimistic than many of the world's other top monetary policymakers in Basel, including the US Federal Reserve chairman, Alan Greenspan, the European Central Bank president Wim Duisenberg and his heir-apparent, the governor of the Bank of France, Jean-Claude Trichet. The governor of the Bank of Canada, David Dodge, said: "The mood is one of guarded optimism ... but with guarded kind of underlined."

Central bank governors of the top industrialised nations yesterday elected M. Trichet to chair their regular Group of 10 meetings, at which they discuss the global economy and international financial markets. He replaces Sir Edward.

The research group Consensus Economics forecasts that growth this year in the world's top industrial nations may repeat 2002's uninspiring 1.7 per cent. This month both the Fed and the ECB have cut interest rates in the US and the eurozone in an effort to maintain economic stimulus.

After the latest revisions showing UK GDP growth of only 0.1 per cent in the first three months of this year, there has been speculation that one of the first acts of Mervyn King, Sir Edward's successor, may be to cut the base rate when the Bank's Monetary Policy Committee meets next week.

Mr King will receive some relief from the latest report by the right-wing Centre for Economics and Business Research, which is today raising its UK growth forecast for 2003 from 1.4 per cent to 1.6 per cent because of higher levels of equity withdrawal from housing, releasing further spending power. But the CEBR is still more pessimistic than the official Treasury forecast of 2 to 2.5 per cent, upon which April's Budget was based.

The CEBR predicts that UK inflation will fall from its present 2.9 per cent to 1.95 per cent by the end of this year, taking the base rate down by 0.25 per cent to 3.5 per cent, and to 3 per cent by the autumn of next year.

This view is supported by the latest survey of pay settlements from the Confederation of British Industry, showing that pay awards in the service sector are at their lowest level for nine years. They averaged an annual 2.8 per cent rise in the three months to April, compared with 3.2 per cent a year ago. Pay awards in the smaller manufacturing sector were 3 per cent, up from 2.7 per cent last year.

Ian McCafferty, the CBI's chief economic adviser, said: "It is clear that pay pressures are not a threat to inflation and are therefore no barrier to an interest rate cut. Retailers are seeing an underlying slowdown in sales, while financial services and tourism are still suffering from low profits."