UK interest rates have peaked at their current rate of 6%, and are heading one point lower, a leading economist said on Thursday.

Roger Bootle, one of the team of economic 'wise men' who advised the last Conservative government, has predicted rates will begin to be cut next spring.

"Interest rates will then fall further in 2002 as [inflation [minus home loans] stays at around 2%," Mr Bootle says in a report for professional services group Deloitte & Touche.

Rates have stayed at 6% since February and, until recently, many economists had expected any movement in rates to be upward to quash inflation fears.

Mr Bootle's view is partly based on his optimism that inflation is tamed, and he believes that higher oil prices will only have a temporary effect on prices, although they might cause the economy to slow down a bit.

He points out that UK inflation has stayed below its target of 2.5% for 18 months, despite a strong economy and low unemployment, and is now the lowest in Europe on a common measure.

Bank of England split

Many in the financial markets believe that interest rates are now at a turning point.

So far the Bank of England has taken a cautious approach, leaving rates unchanged since February.

Members of the Bank of England's Monetary Policy Committee, which sets interest rates were unanimous in a decision to maintain the 6% level in October.

The deciding vote of Bank governor Eddie George was needed to prevent previous meetings of the committee introducing a rate rise, after members were split 4:4.

Figures released two weeks ago showed the pace of economic growth slowed between July and September to 0.7%, an annualised rate of 2.8%.

Growth in the previous three months was reported at 0.9%, or 3.5% over a year.

Growing too fast?

Some other economic forecasters are more worried by the fast growth of the UK economy, which they believe will continue to add to inflationary pressures.

The well-known think tank, the National Institute for Social and Economic Research (NIESR), argues that the economy will grow by over 3% in both 2001 and 2002, leading to further interest rate rises of at least 0.5%.

"The continuing economic expansion and decline in unemployment now mean that the risks of monetary policy being too loose outweigh the risks of it being too tight," the forecasters said.

Both Mr Bootle and the NIESR forecast a huge government surplus of around �15bn next year, at least �10bn more than the government is predicting.

And they argue that does give the government scope to deal with the fuel protests or cut taxes.

As Mr Bootle says:
It is time that politicians here engaged in an open dialogue with the British people over what should be done with our substantial surpluses."