Risk of recession minimal, Eddie George tells MPs

THE GOVERNOR of the Bank of England said yesterday there was "scarcely any possibility" of the UK slipping into recession. Eddie George told MPs on the Treasury Select Committee that it would be "very disappointing" if UK GDP growth slowed to just above zero, the worst-case scenario in the Bank's latest inflation report.

But remarks from other members of the Monetary Policy Committee previously in favour of increasing borrowing costs, along with figures showing weaker than expected high street sales last month, encouraged the view that interest rates have reached their peak.

The financial markets shrugged off other, more buoyant, figures to take the pound nearly 2 pfennigs lower to DM2.87, its weakest for nearly seven months.

Charles Goodhart - the hawk who became a dove at April's MPC meeting, when he switched to vote for no change in rates - told the Treasury Committee that the strong exchange rate and the then-weak earnings data had swayed his decision. He tended to give "a fairly high weight to data coming out of the labour market".

But Professor Goodhart said the recent depreciation of the exchange rate and last week's stronger than expected earnings data did not necessarily mean it was right to raise rates. "Other factors have changed too," he said.

But the pay figures clearly remained a matter for concern. Mr George said Bank staff were working hard to try and discover what lay behind the jump in average earnings reported last week.

This was at least partly caused by annual bonuses. But the Governor said if it transpired that the underlying trend in average earnings was strong, then this was "potentially one of the most worrying elements". However, he added it was wrong to pick on one thing when making interest decisions.

Dove-like comments were also made by Willem Buiter, who has voted to raise rates since the start of the year. Professor Buiter told MPs that he thought stagflation - the combination of low growth with high inflation - was "a risk but not a likelihood".

The latest economic statistics showed no sign of a sharp slowdown. Retail sales volumes rose by a modest 0.1 per cent in April, mainly because bad weather hit clothing and footwear sales. The year-on-year growth rate stayed unchanged at 4.2 per cent.

The figures provided more evidence of a gentle slowdown in consumer demand, although the weather effects meant they had to be interpreted with caution. Clothing and footwear sales fell 1.5 per cent during the month to a level slightly lower than a year earlier, bucking expectations of an increase due to the late Easter holiday.

At the other extreme, household goods volumes surged 2.3 per cent during the month to a level 12.6 per cent higher than a year earlier.

Other reasons for caution were provided by the rest of yesterday's batch of evidence, which showed broad money growth climbing back into double figures, a pick-up in mortgage lending, and a strong jump in business investment in the first quarter of this year.

Figures from the British Bankers' Association and the Building Societies Association showed that their combined new lending to home-buyers was pounds 405m higher in April than March, at pounds 1.7bn. This was the same level as last April, when the housing market was performing particularly strongly.