Interest rates `may have to rise'

The Government's favourable run of good news on the economy continued yesterday with figures showing an unexpected fall in unemployment last month.

However, the latest confirmation that the economy is reviving dashed hopes of further reductions in the cost of borrowing. Eddie George, Governor of the Bank of England, warned that interest rates might have to rise if demand continues to accelerate.

The number of people claiming unemployment benefit fell to its lowest level for nearly five years last month. The headline jobless total dropped unexpectedly by 27,500, falling below 2.2 million for the first time since April 1991.

Mr George, speaking on Chancellor Kenneth Clarke's home turf, added his support to this new boost for the Government's hopes that it can go into the general election with the economy in good shape.

"The prospects for sustained economic growth with continuing low inflation remain, for the time being, just about as encouraging as they have been for a very long time," he said in a speech to the Nottingham-shire Chamber of Commerce last night.

However, the Governor warned that it was essential to show a commitment to permanently low inflation. "Inflation certainly won't stay dead of its own accord," he said.

This echoed his comments in last month's meeting with Mr Clarke, at which they agreed to cut the cost of borrowing for the third time in four months. According to minutes of the meeting released yesterday, Mr George said there was a possibility that interest rates would have to rise if there was clearer evidence that the growth in output had begun to accelerate.

The City of London read this as a sign that there was little chance of a further cut in base rates, as Mr Clarke will be eager to avoid the risk of having to raise them before the general election. A rise in the underlying growth of average earnings to 3.5 per cent in February, after seven months stuck at 3.25 per cent, pointed to the same conclusion.

The International Monetary Fund agreed. Its latest economic forecasts, published yesterday, said that there was little room for interest-rate cuts in the United Kingdom.

As a result, shares fell yesterday from the record they set after upbeat news about the state of the economy earlier in the week.

The unemployment count has declined by 794,500 from its peak of just under 3 million in December 1992, and by 165,200 in the past 12 months. Last month's big fall more than reversed the small increase in joblessness in February, although the figures have been distorted by a strike at JobCentres and benefit offices. Government statisticians said the trend decline was about 10,000 a month.

The more respected unemployment measure based on the quarterly Labour Force Survey showed a fall of 133,000 in the year to February.

The number of people in work rose by 118,000 in the three months to February, according to the LFS. Of these new jobs, 88,000 were part-time, and 75,000 of these part-timers were women.

Labour's employment spokesman, Michael Meacher, said there were 1.4 million people who had been forced into part-time or temporary jobs when they would have preferred full-time work.

"The Government cannot claim economic success while this waste of human resources continues on such a vast scale," he said.

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