Bank governor predicts static interest rates

Interest rates will remain largely unchanged this year, the outgoing Bank of England governor, Sir Edward George, predicted today as he played down the risks to the UK economy.

Against a backdrop of increasing alarm about the imbalances in the world's fourth-largest economy, Sir Edward, who steps down in the middle of this year, said house price inflation would likely moderate this year, but dismissed fears of a crash in house prices.

"What we are anticipating is that the rate of increase in house prices will moderate quite sharply...that's consistent with moderation in consumer spending. I don't see why there should be a crash in house prices," he told BBC Radio Four's Today programme.

The latest mortgage lending figures from the Bank seemed to bear out Sir Edward's comments, showing a slowdown in spending in November. The Bank said a total of ?20.3bn was advanced during the month, down from October's total of ?20.4bn, but still the second highest figure ever recorded.

Net mortgage lending, which takes into account redemptions and repayments, was also lower at ?7.4bn from October's ?7.9bn, although this too was the second strongest month on record. The figures are in line with those from the Council of Mortgage Lenders, which said total lending for November reached ?20.5bn, slightly below October's figure of ?21bn.

While there were several risks facing the economy, Sir Edward said he expected Britain to grow at a rate similar to that seen in 2002 - between 2-2.5% - throughout 2003 and inflation to remain close to its target of 2.5%. Given this benign scenario, he did not expect "a sharp change in either direction" in interest rates.

"We are anticipating that the UK economy will grow close to trend and inflation remains close to target. That's not something that implies a sharp change in interest rates in either direction," he said.

The Bank, which meets next week to discuss monetary policy rates, kept base rate unchanged at 4% all last year, the first time the cost of borrowing has stayed the same for an entire year in more than four decades.

On the downside, Sir Edward said the precarious state of the global economy posed the biggest risk to the UK .

"The most important risk is the risk to the global economy," he said. "I think what can help the UK economy more than anything I think of is for a clearly established stronger recovery in the world economy."

But again, Sir Edward struck an optimistic note, pointing to the latest economic data in the US. "We are still hopeful that the world economy will pick up," Sir Edward said, "and indeed the encouraging news from yesterday was the rise in manufacturing output reported in the United States."

The Institute for Supply Management in the US yesterday said its index of manufacturing business conditions had risen to 54.7, well above the increase to 50.3 analysts had expected. The reading was the best since June and it was the first time since August that it has climbed above 50 - the level which separates contraction and expansion.

Despite Sir Edward's reassuring comments, there are indications that consumers may be curtailing their spending, removing a vital prop for the UK economy. The Confederation of British Industry said yesterday that pre-Christmas retail sales appeared to have been static for the first time in 10 years. The nightmare scenario is of a collapse in consumer confidence that could trigger a crash in housing prices - an outlook that Sir Edward was at pains to play down.