Sir Edward remains optimistic

The British and world economies will recover gradually, in spite of uncertainties over a war in Iraq, the governor of the Bank of England has said.

Speaking at a dinner in London, Sir Edward George said he expected "a gradual pick-up in the pace of global recovery over the next year or two".

Sir Edward predicted that economic growth would stay close to 2.5% in the next couple of years and optimistically foresaw a much-needed pick-up in business investment.

But he warned there were now signs of slower consumer spending.

Steady as she goes

Sir Edward, who retires in June after 10 years as head of the central bank, predicted inflation would stay close to its 2.5% government-set target over the next couple of years.

It is reasonable to look forward to a gradual improvement - and I emphasise gradual improvement - in the external environment Sir Edward George

He admitted further short-term inflation rises were likely, after underlying inflation hit 3% last month.

April's rise in local authority taxes and the recent fall in the pound against the euro could also mean short-term rises.

But he said the longer-term outlook was more positive.

"There is no evidence at this point of continuing, second-round effects, for example in the labour markets, so that inflation seems likely to fall back to the 2.5% target rate in the course of next year."

Rate cuts?

Sir Edward remained tight-lipped on the prospect of another cut in interest rates.

The MPC's surprise cut in February took the cost of borrowing to 3.75%, its lowest rate in 48 years.

There have since been suggestions that the bank is considering various scenarios, including the possibility of raising rates.

The bank chief made little comment on the current war in Iraq, except to say he hoped it would end as soon as markets had - until recently - been expecting.