British rates ‘may need to rise further’

BANK OF ENGLAND chief economist Charles Bean said interest rates may need to rise further as the economy picks up strength, though policymakers will move gradually and take time to consider the impact of their changes.

Speaking in an interview with Bloomberg News, Mr Bean said borrowing costs remain "stimulative" after the British central bank raised the benchmark lending rate a quarter percentage point to 3.75% earlier this month.

"We've had interest rates at historically low levels," said Mr Bean. "If growth stays above Britain's trend rate for any significant period, then further interest rate rises may be required. We'll take this one step at a time. We want to look at this cautiously and see how things pan out." The comments may restrain predictions for how quickly policymakers will increase interest rates in the coming months. Futures markets suggest the bank may raise its benchmark rate a full percentage point during the next year.

The yield on three-month sterling deposits maturing in September next year rose to 4.90% at 3.55pm in London from 4.81% on Friday. That compares with the current money-market rate of 3.98%.

The bank expects growth to push past 2.5% the "trend" rate of growth it considers compatible with stable inflation through most of next year. The economy grew 1.9% in the third quarter. The bank assumes exports will accelerate and consumers spending will slow.

"We're after the Goldilocks consumer not too hot and not too cold," said Mr Bean. "The level of interest rates is probably somewhat below where it's likely to be some years down the road.

We need to make sure that growth is just a little bit above potential." said Mr Bean, who turned 50 in September, joined the bank's nine-member Monetary Policy Committee in October 2000 after serving as a professor at the London School of Economics. He has voted once against the majority in January 2001 pushing with three other members for a rate reduction when the rest of the committee wanted no change.

An adviser to the Treasury under both Labour and Conservative governments in the 1970s and 1980s, he asked to extend his term at the bank past May 2004, when his current tenure expires.

In an hour-long interview, Mr Bean suggested the bank is relaxed about the prospects for inflation to accelerate much past the 2.5% annual target. He said there's room for the labour market to grow, that the current account deficit looks manageable and that he's become "more sanguine" about consumers borrowing at record rates. He also said the bank is "comfortable" with the current level of the pound.

The pound has fallen 6% during the past year, measuring 100.2 on the bank's trade-weighted index compared with 106 in November 2002.