Barclays forecasts further rate rises

UK interest rates may still have to rise in order to keep inflation on target, according to Chris Wright, the economics director at Barclays Bank.

Underlying inflation fell to 2.5 per cent in January, in line with the Government's target, but the current low level was due largely to the strength of sterling, which was holding down the cost of imported goods and raw materials, said Mr Wright.

"Domestically generated inflation is above the target level and shows little if any sign of slowing," Mr Wright argues in the latest issue of the Bank's quarterly economic review. "In particular, the pace of wage increases is rising, and looks set to climb further unless domestic demand slows sharply."

Output grew by 3.3 per cent last year, unemployment fell, inflation was broadly stable and the current account moved into surplus for the first time since 1985. But manufacturing output declined in the fourth quarter with exporters worst affected, but the domestic economy prospered and wage settlements rose. "This contrast is likely to become increasingly stark in the first half of this year," he writes.

There is no obvious case for adjusting the tax balance in the Budget, Mr Wright says. But the bank expects growth to slow to 2.5 per cent this year and 1.3 per cent in 1999, while the current account shows a pounds 6bn deficit this year and pounds 7bn next.