No rate hike as activity rises

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The Independent Online
BUSINESSMEN will return to their desks from the bank holiday on Tuesday to an autumnal economic landscape rosier than even hard-core optimists were predicting in May.

"The theme at the start of summer was still the Asian financial crisis," said Stephen King, HSBC's global economist. "The theme now is the world economy back to the way it was in early 1997 before the crisis."

Economic figures and projections released last week underpinned the bullish mood. The Confederation of British Industry said on Thursday it is revising its forecast for 1999 UK economic growth from 0.8 per cent to 1.2 per cent. And house-price inflation, now 8 per cent annually, is forecast to peak at 13 per cent in the spring of 2000, said NatWest Group's market intelligence department.

Beyond these shores, the Dow Jones Industrial Average hit a record high of 11,299.76. And euro-zone industrial production grew in May after declining since November, reported Eurostat, the EU's statistics agency.

This is all in stark contrast to earlier fears of a sharp downturn. "What's happened is that Asia is returning to growth faster than anyone predicted," said Andrew Cates, senior international economist at Warburg Dillon Read. "That's good for the traded goods sector in Europe and the US."

Still, despite this accelerating economic activity, analysts say UK interest rates are likely to stay at 5 per cent until next year.

On Tuesday, the Federal Reserve Bank raised the US federal funds rate from 5 to 5.25 per cent to pre-empt rising inflation. This sparked fears that the Bank of England's monetary policy committee would follow suit when it meets next week.

On Friday, however, City analysts said the Bank is unlikely to boost rates until next year. "The MPC may raise rates, but not immediately," said Mr Cates.

Forecasters see two clouds on the horizon. "The Y2K issue makes forecasting difficult," said Peter Gutmann, a senior manager in NatWest's market intelligence department. Worries that the computers of some banks could crash at midnight on 31 December will cause a slowdown in financial dealing this autumn, he and others say.

The other negative is the record current account deficit in the US. Investors are tiring of US bonds and shares, and global capital is flowing into real, as opposed to financial assets.

"What you're talking about here is higher US interest rates and a falling dollar," said Mr King. That combination in the past, in the context of a bubble economy, which the US shows signs of being, has led to a collapse in asset prices."

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