More interest rate rises looming
THE Bank of England has lifted its growth and inflation forecasts, reinforcing expectations of more interest rate rises in the coming months.
In its quarterly Inflation Report, which also sounded alarm bells over household debt and the housing market, the Bank said the economy was on course to expand faster than its 2.5% trend rate over the next two years, driven by High Street spending, Government expenditure and business investment.
Growth by the end of 2004 is now seen around 2.8%, against the previous 2.6% forecast, even after last week's quarter-point increase in the cost of borrowing, which should put the brakes on the economy.
However, BoE Governor Mervyn King said record household debt posed a threat to the rosy outlook.
He said: 'Even though the picture of indebtedness for all households taken together is by no means as bad as some of the headlines might suggest, we need to know rather more about the current distribution of that debt.
'There is a risk that some heavily indebted households will be badly affected by changes in economic circumstances or interest rates.'
He added that everyone needed to think carefully about the amount of debt they could afford.
Latest figures show Britain's consumer debt mountain at almost £1 trillion, equivalent to the total value of the economy and 120% of households disposable income.
The Bank said that, following evidence of a fresh pick-up in house-price inflation, the property market was not now expected to cool as rapidly as previously thought. And it added that it believed the risk of an early-Nineties style price crash had not gone away entirely.
The report said: 'The longer that house-price inflation continues to exceed growth in average household incomes, the greater the additional upward pressure on spending and inflation in the near term, and the greater the chance of a sharp adjustment in house prices and thus to spending further ahead.'
Although inflation, currently 2.8%, is expected to slow over the next few months, stronger growth and sterling's fall on foreign exchanges will lift it back above the Government's 2.5% target by the end of 2005. In the interim, inflation would remain 'close' to 2.5%.
Economists said the report pointed to higher interest rates, though the speed at which they will rise remains unclear.
Geoff Dicks, at Royal Bank of Scotland, said: 'Our forecast is for the next rate hike to come in February but this report opens up the possibility that it might be as soon as December.'
John Butler, at HSBC, said: 'The latest projection could easily be used to support a hike at either the December or January meeting, so that door remains, though we expect the MPC will not walk through it.'
