No need for rate cuts, says Barclays

INTEREST rates are unlikely to be cut below 5 per cent but economic recovery will continue to strengthen, Barclays Bank forecasts today.

Writing in the bank's latest economic review Alan Davies, its chief economist, dismisses recent gloom about the state of the UK economy and predicts further expansion. He argues that recent disappointing figures for unemployment and industrial production did not mean the economy was slipping back.

'They should not detract from the fact that the overall recovery has been stronger than expected a year ago. At the turn of the year, business surveys indicated levels of optimism similar to those recorded some five years ago before the recession took hold.

'Consumer confidence appears to have been on a rising trend over the past year and the recent survey by Gallup in January showed sentiment to be above its long-run average.'

Interest rates, currently at 5.25 per cent, do not need to be cut because the economy is growing sufficiently strongly and a reduction would reignite inflation, Mr Davies says.

Consumer spending is being fuelled by people running down savings rather than having higher incomes to fund more purchases.

Companies are also doing well, pushing up profits and increasing investment. Exporters are performing strongly.

Mr Davies says the strength of the UK economy is not evident to the public because of the lingering effects of the recession, such as negative equity on homes and high debts. The recovery is also slower and not broadly based, with some industries such as banking and retailing experiencing major structural changes and heavy job losses.

Barclays expects unemployment to fall this year to 2.55 million, and to 2.35 million by the end of next year. Economic growth will average 2.7 per cent in 1994 and 2.9 per cent next year.