Central Banks issue rates warning

The Bank of England has kept interest rates the same since November

LONDON, England -- The European Central Bank and the Bank of England have raised the prospect that interest rates could rise soon.

The ECB, which sets rates for the 12-nation eurozone, said so-called "staff projections" showed inflation could overshoot its two percent ceiling. It revised upwards its inflation forecast to between 2.1 percent and 2.5 percent, from 1.1 percent to 2.1 percent forecast half a year ago.

Bank of England (BoE) Governor Edward George also said on Thursday the central bank would have "no option" to raise interest rates if domestic demand does not slow because that would generate inflationary pressures.

"At some point we will have to moderate the rate of growth of domestic demand," George told a parliamentary committee.

The ECB's key lending rate remains at 3.25 percent, after being slashed four times in 2001 in an effort to reverse the economic downturn, while the BoE's interest rate remains at 4 percent, the lowest level in 37 years, after cutting it seven times last year.

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But with UK consumer spending still booming and industrial output recovering, economists expect the Monetary Policy Committee of the BoE to raise interest rates as soon as next month.

BoE Deputy Governor David Clementi also warned that house price inflation, which is running at more than 18 percent annually, was "unsustainable" and there could be a sharp correction.

The ECB's economists also revised up their inflation forecast for 2003 to between 1.3 percent and 2.5 percent from their December forecast of 0.9 percent to 2.1 percent.

Analysts told Reuters the projections give the ECB ammunition to deliver a rate hike after keeping rates steady since November last year.

"The inflation forecast is obviously a concern,'' said Glenn Davies at Credit Lyonnais. It is certainly a reminder we must be getting close to an interest rate hike,'' he said, adding that there was a fair chance of a quarter point hike already in July.

The forecasts were released along with the ECB's latest monthly bulletin for June, which said the inflation outlook had worsened.

"It is... particularly important for monetary policy to remain vigilant with regard to the further evolution of the key factors determining the outlook for prices,'' the bank said.

ECB President Wim Duisenberg refused to repeat the ECB's standard phrase that interest rates were at appropriate levels. "I did point out there are some increased risks for price stability so it is not by chance that you didn't see the word appropriate,'' he told a news conference.

The ECB bulletin also said the 12-nation eurozone had now started a gradual recovery and would reach the central bank's 2 percent to 2.5 percent cruising speed later this year.