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Bank of England official: Interest rates too low

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by Elaine Frei
Bank of England official: Interest rates too low

A deputy governor of the Bank of England has said that interest rates in the UK are too low. In explaining why he voted for a rate increase at the last meeting of the Bank’s Monetary Policy Committee, Sir John Gieve said that he “was not convinced” that demand for credit would be kept to a sustainable level with rates at their current level. He also said that the risks of a slowdown by increasing rates were not as great as the risk of not raising rates and allowing inflation to rise to a level that would ultimately require interest rates to go even higher and cause even more of a slowdown in the economy. In addition, he said that while there are beginning to be signs of a slowdown in the housing market house prices, especially in London, are still rising sharply.

Business leaders are not convinced that rates need to go higher, however. The most recent data from the Confederation of British Industry showed that sales were down substantially in June. The Confederation’s index was at 17 in June after a reading of 31 in May, it’s lowest level since November. Sales of summer clothes and shoes suffered from bad weather, while sales of furniture and durable household goods also declined. The head of the CBI’s survey panel said that the new figures show that the higher cost of borrowing is leading to a slowdown in spending by consumers. Despite the newest retail sales numbers, however, most analysts believe that interest rates in the UK will be raised to 5.75 percent in July and some think that rates will rise to 6 percent by the end of the year.

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News posted: June 27, 2007

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