King resists calls for interest rate rise

The governor of the Bank of England, Mervyn King, dismissed mounting City speculation about an imminent rise in interest rates when he told MPs that rampant consumer spending in Britain would ease of its own accord.

Despite figures yesterday showing that demand for home loans hit a fresh record last month, Mr King said the Bank saw no urgent need to reverse July's cut, which took rates to a 38-year low of 3.5%.

"So far we don't think that the risk of a correction to overall spending in the economy is sufficiently large to mean that we want to slow down, deliberately slow down, the rate of consumer spending over and above the slowdown that we think is already there," he told backbench MPs on the Treasury select committee.

Mr King said the Bank expects the housing market to cool over the next two years.

But this benign assessment contrasted with a warning from the IMF of the dangers of a violent crash. "The risk of an abrupt unwinding cannot be ruled out," the fund said in its half-yearly assessment of the world economy, in which it reduced its forecast for UK growth to 1.7% this year.

The IMF's downgrade underlined warnings from City analysts that the chancellor, Gordon Brown, will be forced to cut his forecast of 2-2.5% this year in November's pre-Budget report.

Britain's weak economic performance in the first half of the year has fed through into a more rapid deterioration in the public finances than the Treasury was predicting. Figures released yesterday by the office for national statistics showed that net government borrowing in August was £4.8bn, £3bn higher than in the same month a year ago.

Mr Brown's deficit for the first five months of the 2003- 04 financial year stood at £16.8bn, up from £8.6bn last year. City analysts said the government was on course to overshoot its borrowing target of £27bn for the full year by about £10bn.

With government spending exceeding Mr Brown's forecasts and tax receipts lower than expected, Michael Hume from Lehman Brothers said: "Some small scale tax increases in the Budget cannot be ruled out."

Business leaders urged Mr Brown not to raise taxes on business to fill the growing black hole in his balance sheet.

"If in the future higher taxes prove inevitable, it is imperative the tax burden on the business sector should not be increased further," said David Kern, an economic adviser to the British Chambers of Commerce.

The pressures on business remain acute, according to the latest snapshot of industry from the Confederation of British Industry. Tentative signs of recovery in the world economy failed to boost factory order books.

In this month's survey, 45% of firms said total orders were below normal while 12% said they were above, with the resulting balance of -33% being worse than the -24% recorded in August.

Ian McCafferty, the CBI's chief economic adviser, said: "Some firms had hoped the worst was behind them, but manufacturers are not out of the woods yet."

With industry weak, consumers are continuing to shoulder the burden of growth. Retail sales volumes rose by 0.2% in August and by 1.7% over the quarter as consumers continued to fund their spending by stacking up more debt.

Mortgage lending rose by a record £11.5bn in August, according to figures from the Council of Mortgage Lenders.