George warns on rising markets

EDDIE GEORGE, Governor of the Bank of England, yesterday echoed his US counterpart Alan Greenspan with a warning that the stock market was in danger of becoming overheated. "We have seen an extraordinary sustained rise in stock market prices." he said. "But for the rise to continue, you've got to assume a rate of growth of earnings that would be remarkable by any kind of historical standards."

Mr George questioned whether that was likely. "If the prospects for earnings tail down, won't there have to be an adjustment in the stock market?" he asked.

The Governor's warning was similar to that of Alan Greenspan, chairman of the US Federal Reserve, who last year warned that the financial markets were guilty of "irrational exuberance".

Mr George said there were good reasons why the stock market had risen so steadily until now. "A lot of that can be explained by the move of the world economy to a more stable general environment, so that nominal yields on riskless assets have come down very substantially and you'd expect other asset prices to rise to reflect that." However, this adjustment did not mean that share prices would carry on rising indefinitely.

Speaking on BBC Television, Mr George said the Bank of England was concerned about the effect on Britain from the economic crisis in Asia.

He noted that some individual companies had already been affected. "But across the economy as a whole, that's not yet a huge effect, and actually we don't expect the impact on the United Kingdom directly to be as great as it is going to be for example on the United States economy, and possibly on the continental European economy.

"But we then expect that there could be an indirect effect as this thing accumulates, and so we're very concerned about the situation in Asia."

Turning to the domestic economy, Mr George said that higher wages and rising prices in the service industry were the largest threats to stable prices.

"The increase in earnings is inevitably going to affect all parts of the economy," he said. He added that while the prices of wholesale goods had been relatively stable, "service prices have been trending up".

However, Ruth Lea, head of policy at the Institute of Directors said employers should not get all the blame for rising inflation. She said that, if bonus payments were stripped out, pay settlements were running at 4.3 per cent rather than the headline figure of 5.2 per cent.

- Agencies