Interest rate rise may be looming

BANK of England Governor Mervyn King today fuelled speculation that interest rates could rise as soon as May, predicting High Street spending will recover from current depressed levels.

Warning it was premature to draw conclusions about the outlook for consumer spending, King said there was 'no doubt' retail sales over Christmas and the start of 2005 had been weaker than expected.

But he added: 'The scale of the slowdown we have seen in retail sales is likely to prove temporary.' Retailers are hoping the Easter break will kick-start sluggish activity on the High Street.

During a grilling from MPs on the Treasury Select Committee, King said there were signs the housing market was stabilising and that some of the factors that had held back inflation in the past two or three years were 'going away'.

Paul Tucker, a member of the Bank's rate-setting monetary policy committee, elaborated on why he had voted for a quarter-point rise at the last two meetings.

'When one goes round the country talking to business people, the majority are now saying, 'Yes, we're working at high levels of capacity utilisation'. I think that, in these circumstances, a little tweaking is needed,' he said. But MPC colleague Marian Bell said she believed there was still slack in the economy.

King said the minimum wage was starting to have an impact on wages. 'Employers are saying it's beginning to affect wage settlements,' he said.