MPC 'dove' hints that UK interest rates have peaked

A member of the Bank of England's Monetary Policy Committee yesterday gave the clearest hint so far that UK interest rates have peaked.

A member of the Bank of England's Monetary Policy Committee yesterday gave the clearest hint so far that UK interest rates have peaked.

DeAnne Julius, a leading MPC "dove", told a German newspaper inflation would remain below the Government's 2.5 per cent for the whole of next year. "We have not changed interest rates for the past eight months," she told Die Welt Online. "This could show that the MPC sees rates are at the correct level." Although her personal views are well known, the financial markets responded to the hint that she was speaking for the whole committee.

The pound fell to a three-week low of 59.66p against the euro. The yield on both UK government bonds and on short-sterling - indicators of future interest rate moves - also fell. But Ms Julius said her comments did not mean the Bank was in a position to start cutting rates and offered little comfort to manufacturers, saying industry had learned to live with a higher exchange rate against the euro.

The sense of optimism about the future direction of rates was boosted by further weak UK economic data and a forecast by a leading economist that rates would hit a trough of 5 per cent in 2002. Roger Bootle, economic adviser to the accountants Deloitte & Touche, said "powerful" deflationary forces would keep inflation below target. "We believe base rates have peaked and that next year they will head down towards 5 per cent," he said.

The extent of deflation on the high street was highlighted by a survey today from the British Retail Consortium showing prices fell 0.5 per cent in October. On an annual basis, prices are 0.2 per cent lower than a year ago.

Construction has became the latest sector to show signs of a slowdown, according to two surveys. The Chartered Institute of Purchasing and Supply said the pace of growth fell back last month to its slowest level for 19 months. Government figures showed a 2 per cent fall in output over the three months to September compared with the previous quarter.

Meanwhile, the European Central Bank decided to keep interest rates on hold as a survey of eurozone manufacturers showed growth slowing to its weakest rate for nine months.

The euro, which had surged as high as $0.8660 against the dollar on a growing view that the US economy was slowing, fell back on the news. It was further undermined by figures showing the productivity of the average American worker rose faster than expected. The hourly output per worker rose 3.8 per cent in the third quarter, down from the second quarter's meteoric 6.1 per cent, but ahead of a forecast 3.5 per cent. By late afternoon the euro was at $0.8540.

Wim Duisenberg, ECB president, said the euro was undervalued. "The development of the exchange rate over the last two weeks I may call gratifying," he said. "It may be correcting somewhat the strong undervaluation of the euro as we think there should be more normal growth rates in the US."

But analysts said predictions for a rebound in the euro were premature. Stephen Lewis, chief economist at Monument Derivatives, said: "Capital flows hold the key to the euro's fortunes. It is too soon to say the euro is out of the woods."