BoE to keep rates on hold

January 9, 2002 Posted: 0847 GMT

LONDON (CNN) -- The Bank of England is expected to keep interest rates on hold this week, amid signs of strong consumer spending and increased borrowing.

And some economists are warning that UK rates may actually rise in the coming months if the world's fourth biggest economy shows signs of over overheating.

The BoE cut its key rate seven times in 2001, the most recent coming in November when the bank trimmed half a point to 4 percent -- the lowest level in 37 years. The BoE's monetary policy committee begins meeting on Wednesday and a decision on interest rates will be announced on Thursday at 1200 GMT.

While many believe the central bank still has room to cut rates further,  especially with inflation running at 1.8 percent -- well below the BoE's target of 2.5 percent -- there are indications interest rates may have bottomed out.

Bear Stearns, in its economic outlook, expects the central bank to keep rates on hold "in the wake of BoE Governor Eddie George's hawkish comments last week."

In a radio interview, George played down the need for further cuts and said the bank might even consider raising rates to slow consumer demand.

With retail sales rising and interest rates at the lowest level in four decades, George said consumers were spending too much and piling up too much debt. 

"If the world economy begins to pick up, as I suspect it will from the middle of the year, then consumer demand will have to moderate," George told the BBC. If that does not happen, he said, "that is when we would be putting up interest rates."     

Bear Stearns said those comments were a "deliberate shot across the market's bows that UK rate policy is at a cusp."

Paul Donovan, an economist at UBS Warburg, told CNN that Thursday's rate decision is a "fairly close call," although many had been expecting another cut from the bank.

"But the governor's recent comments probably rule that out," he said.

However, some experts are beginning to think UK rate will soon be heading higher, given the country's resilience during the global economic downturn.

"It's clear the UK [economy] didn't swing as much as most," said one analyst, adding the BoE would be in a position to raise rates before either the European Central Bank or the U.S. Federal Reserve.

The BoE's committee will have plenty of economic data on which to base its decision.

These include the BoE's own figures, released last Friday, which showed borrowing by British consumers jumped in November by the biggest amount in eight years – buoyed by low interest rates and low employment.

Halifax, the UK's biggest mortgage lender, said on Tuesday that house prices jumped 2.9 percent in December, compared to a 2 percent rise in November. The December increase was the biggest monthly rise in more than two years, Halifax said.

On an annual basis, it said house prices were up 15.5 percent – the strongest rate since January 2000.

"Despite the terrible events of September 11 and the dramatic slowdown in the world economy the housing market has shown remarkable resilience," said Gary Styles, head of group economics at Halifax, told Reuters.

Last week, the Confederation of British Industry reported that UK retailers enjoyed the best start to the Christmas shopping period in 14 years.

On Tuesday, another electronics chain – Electronics Boutique – reported a 47 percent jump in same store sales in the five weeks to December 29, while clothing retailer Next said its same store sales grew 9 percent for the 23-week period ended January 5.

"We beat our expectations in the run up to Christmas and this time last year we had particularly high stock levels leading to a bigger clearance," Next chief executive Simon Wolfson told Reuters.

"Certainly, the growth rate we've been seeing is well ahead of our long term growth rate for like-for-like sales, which is between 3 to 5 percent," he said.

Michael Hume, economist at Lehman Brothers, told Reuters: "Anecdotal evidence of buoyant Christmas shopping has been all the rage over the past few weeks.

"To cut rates in the face of that would be very odd indeed."