Business chiefs welcome Brown's historic decision

Business leaders yesterday welcomed Labour's historic move to grant the Bank of England independence in setting monetary policy although there was not universal support for the latest base rate rise.

Adair Turner, director-general of the Confederation of British Industry, said he very much welcomed the decision describing it as "a useful move in an intelligent direction". In a statement, the employers' organisation added: "Business has pressed for month-to-month interest rate decisions to be clearly free of political influence. This move will enhance the credibility of the UK's monetary policy, and over time lower the cost of finance for industry by reducing the risk premium in UK interest rates."

The CBI said that the tightening in monetary policy represented by the quarter-point increase in interest rates was necessary against the background of strong consumer demand. However, it urged the Chancellor Gordon Brown to use his first budget to raise personal taxes, thus making further base rate rises less necessary.

"This policy mix would reduce the imbalanace in fortunes at present between exporters, whose profits are being hit badly by a strong sterling and domestic service industries, where inflation pressures are increasing."

British Steel is expected to deliver a similar message to Gordon Brown later this week when it sets out its views on how to curb inflation. The company has been one of the hardest hit by the appreciation of sterling, every 10 pfenning rise against the German mark knocking pounds 100m from its profits.

John Browne, chief executive of British Petroleum, the UK's largest company, echoed the feelings of many senior industrialists at the prospect of greater stability in economic policy making. "Clearly this is a good move. The track record of independent central banks in Europe is pretty good," he said.

The announcement added to Mr Brown's credibility with the Institute of Directors, which had been less than enthusiastic about Labour before the election. Tim Melville-Ross, IoD director-general, said: "You can't accuse him of letting the grass grow under his feet." Despite the concern of IoD members dependent on the export trade Mr Melville-Ross said the interest rate rise was "about right".

He continued: "My one reservation about an independent central bank was removing all political control. But Mr Brown has answered that by having an inflation target set by Government. It's a pretty restricted freedom, though."

But exporters grappling with the strength of the pound, which has risen in value by 25 per cent over the past year, said the immediate outlook appeared even more bleak. Ironically the Engineering Employers' Federation (EEF) had written to Gordon Brown yesterday morning, before the dramatic annoucements, urging him to tighten economic policy through tax increases and spending cuts rather than interest rate hikes. The EEF feared that an independent bank would make the pound even stronger.

Jeremy Miller, EEF external affairs director, said: "Exchange rates are still affecting our members considerably. We'd rather he'd have taken a different measure than today's rate increase. If an independent bank makes the pound stronger then we are against it.''

The House Builders' Federation attacked the rate rise, saying there was no evidence of widespread inflation in the housing market nor any serious risk of it in the immediate future.