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Bank warns against new rate cut

Peter Torday,Economics Correspondent
Tuesday 18 May 1993 18:02 EDT
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THE BANK of England yesterday delivered a veiled warning against a further cut in interest rates, saying that inflation risked hitting the upper end of the Treasury's target range in 1994.

But the Bank said that, if inflation did hit the ceiling and the trend was clearly temporary, it would not advocate a rise in rates. For the moment, however, there was little risk of this development.

The Bank's latest quarterly report on inflation said the pound's 5 per cent rise against a trade-weighted basket of currencies since its previous assessment in February was 'lowering somewhat the risk of breaching the top end of the target range towards the end of this year'. A further rise in sterling would further reduce that risk.

But the outlook for underlying inflation - the retail price index excluding mortgage rates - could darken next year, partly as a result of the Budget extension of value-added tax to domestic fuel and power bills. The impact of the VAT changes, together with falling disinflationary forces as the recovery gathered pace, suggested a growing risk that the underlying rate could breach the Treasury's 1-4 per cent target range.

The Bank nevertheless predicted formally that in 1994 inflation would veer uncomfortably close to the upper end of the target ceiling but would not break through it.

In the meantime the Bank suggested that further cuts in interest rates or a less stringent fiscal policy could jeopardise the Government's inflation objective.

The Bank also warned that the credibility of the target range and the markets' belief in the Government's determination to hold inflation within it were not fully assured. Credibility would result only from a long period of successfully maintaining inflation within the range.

Professor Patrick Minford, one of the Chancellor's seven independent economic advisers, said last night he was confused by the Government's economic policy.

Speaking on the Sky News discussion programme, Target, Professor Minford said: 'Norman Lamont says he wants a stronger pound, but how can he possibly do so when the whole benefit of getting out of the ERM was do let the pound drop, to find its own level, and to let interest rates fall to allow the economy to recover.

'It's puzzling. It's extremely puzzling and it makes me worry whether he knows what he's doing.'

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