Boe Calls For Rate Rise

Minutes from the July 30 monthly meeting of the monetary authorities showed Bank of England Governor Eddie George is concerned lively consumer activity will reignite inflation and wanted to see a prompt quarter-point rise in the base rate.

, now at 5.75 percent.

On that basis, the Bank saw no justification for further policy stimulus. In fact, as the Chancellor knew, the Bank would

prefer short-term rates at six percent, the minutes said.

Chancellor of the Exchequer Kenneth Clarke, who has the final say on monetary policy, rejected his advice and left rates

on hold, promising to raise them if prices headed higher.

 

But Wednesday's up-to-date figures of high street activity played into the hands of the hawkish governor.

The Office for National Statistics (ONS) said retail sales leaped one percent in August compared with a 0.6 percent fall in

July. Compared with August 1995, sales were 4.4 percent higher.

Even the less volatile three-month growth rate, the ONS's preferred measure of activity, raced ahead. It shot to 1.6 percent in August from 1.2 percent in July, the highest level since the boom year of 1988.

The government pounced on the retail sales data as evidence of the economy's robust health.

With low inflation and clearly improving consumer confidence, Britain is experiencing the most balanced and sustainable economic growth of any major European economy, a Treasury spokesman said.

Recent data has shown the government is so far leading a charmed existence with output growing steadily, the housing market and consumer spending on the up, while inflationary pressures remain dormant.

But August's retail sales data have revived memories of the 1980s consumer boom which came to an abrupt end as inflation, then interest rates, spiralled upwards.

The Bank is eager to avoid a repeat performance and, along with some analysts, is fearful the consumer boom will scupper the chances of underlying inflation meeting the tough 2.5 percent target unless activity is curbed with a rate rise.

Underlying inflation, which excludes volatile mortgage costs, has stuck stubbornly at 2.8 percent for the last four months.

City analysts said the chances of a monetary tightening this side of the general election, which must be held by May 1997, are remote even if prices start to creep up.

There is now enough evidence to convince most people of the need to raise rates before the election, said Michael Dicks, UK economist at Lehman Brothers. But the chances of the Chancellor bowing to the pressure look fairly slim.

In a nation where two-thirds of households own their own home, the cost of borrowing is a hot political issue. Clarke has cut rates four times since December, giving millions of home-owners their cheapest mortgages for a generation.

But despite the low rates and an exemplary economic recovery the ruling Conservatives trail opposiiton Labour by over 20 points in the polls.