BoE chief cautious on rates

February 19, 2002 Posted: 1510 GMT

LONDON (CNN) -- The governor of the Bank of England on Tuesday cautioned financial markets not to expect a sharp rise in interest rates this year.

Eddie George, speaking at an investors conference in London, attempted to cool speculation the central bank's key rate -- now at a 38-year low of 4 percent -- will jump to around 5.25 percent by the end of 2002.

Despite a rise in other rates -- such as those for futures contracts -- he warned not to rely on these as "an indicator of the likely course of official short-term interest rates, at least in the UK."

Investors have been pushing futures contracts higher since George acknowledged in January the BoE may have to raise its benchmark rate if the UK economy showed signs of overheating.

At the time, he cited recent rises in house prices and increased lending as reasons for concern.

The BoE cut rates seven times last year. Still, many economists believe the bank still has room to cut rates further, especially with inflation running well below the bank's target of 2.5 percent.

But others argue those rate cuts have done little to pull the manufacturing sector out of recession.

The British economy, the world's fourth biggest, grew at the slowest pace in almost three years in the fourth quarter of 2001, with GDP for the entire year growing at 2.4 percent compared with 3 percent in 2000.

The slowdown has been blamed largely on a sharp contraction in industrial output, prompting many industry officials to call for more rate cuts -- not increases -- to stimulate production.

George told Tuesday's investors conference that large and unpredictable swings in interest rates may now be a thing of the past, but central banks are still limited by what they can do to adjust the economy.

"Even if interest rates are to some degree less volatile, in a context of overall monetary stability, we certainly won't avoid sectoral imbalances such as we have seen over the past year or so," he said.

"Nor can we exclude policy failures in individual countries, which can, as we saw in the Asia crisis but happily not in the present case of Argentina, have wider repercussions."

-- Reuters contributed to this report