Howard Davies: "economy needs to be dampened down"

Interest Rates "May Have to Rise"

Further rises in sterling would depend instead on the expectations of the formation of a European single currency and the pound being regarded as a "safe haven" against the possibility of a weak euro.

As Deputy Governor of the Bank of England, Mr Davies was a member of the Monetary Policy Committee, to which Chancellor Gordon Brown gave operational control over interest rates a few days after Labour came to power.

"I think that a modest rise in interest rates may well be necessary in order to dampen this down, whether now or later," he told the BBC Radio 4's Today programme.

"If you look at the yield curve in the market, the market is expecting rates to rise by (between) half (and) three-quarter per cent over the next few months or next year or so - that seems to be the market expectation," he said.

Mr Davies would not go so far as to predict when interest rates would rise, and he said he believed the Monetary Policy Committee would stick to its target to ensure inflation did not rise.

Slump In Export Orders

New export orders in the manufacturing sector have fallen in the first time for 18 months, according to a report published that confirmed the impact of the appreciation of sterling.

A survey of manufacturing managers', the Purchasing Managers' Index, found exports orders dropped for the first time since January 1996. But overall the manufacturing industry enjoyed its 14th consecutive month of growth, according to the report from the Chartered Institute of Purchasing and Supply (CIPS).

It showed the rate of growth had slowed slightly as the index dipped to 53.4 from 53.5 in June, where any reading over 50 represents expansion in manufacturing.

"What should the Government do about the spending boom and the high pound?" by BBC Economics Correspondent Evan Davies

Base rate changes since 1992