Bank guru hints at loan rate cut

One of the Bank of England's nine-strong group responsible for setting interest rates dropped the broadest of hints yesterday that the cost of borrowing in the UK is likely to fall in the coming months to counteract the deflationary impact of the terrorist attacks on America.

Christopher Allsopp, a member of the bank's monetary policy committee, said the world outlook was "extremely uncertain", and stressed that any fall in consumer spending in Britain would increase pressure for further action to boost the economy.

His comments came a day after the bank cut interest rates to 4.75%, the lowest for 37 years, and echoed the widespread feeling in government circles that fresh cuts in borrowing costs will be needed this year.

The chancellor, Gordon Brown, is seeking an early meeting of finance ministers and central bank governors from the group of seven leading industrialised countries in bid to forge a coordinated international response to the deteriorating global economic outlook. A G7 gathering had been planned to coincide with the annual meeting of the International Monetary Fund and World Bank in Washington at the end of the month, but was scrapped when security fears forced those meetings to be called off.

Mr Brown is eager for the G7 meeting to go ahead, both as a sign that normal business has been resumed and to come up with a clear set of policies to be pursued by the developed world to boost demand and prevent unemployment rising.

Despite attempts by policy-makers in the immediate aftermath of the terrorist attacks to play down the economic risks, there is wide concern that a recession in the already weak US economy is all but inevitable and will ripple out to the rest of the world.

In his speech in Dublin yesterday, Mr Allsopp said that while it was too early to make a balanced assessment of the economic and financial impact of the terrorist attacks on the US, "it is notable that interest rate declines are already priced into financial markets".

He added: "The threat to US consumer confidence and to demand that was already present has been much intensified. The fact that policy can be expected to respond - in the US and elsewhere - does not of course mean, in a world of uncertainty and lagged responses, that large shocks can or will be completely offset."

On the UK, he said a sharper-than-expected fall in consumer demand "would mean that interest rates would have to be cut to keep prospective inflation on target".

The bank's task is to hit the government's inflation target of 2.5%, but any weakening of growth might lead to smaller rises in living costs, forcing the MPC to expand demand in order to raise inflation.

However, Mr Allsopp said tthe chances of cheaper borrowing would be reduced if sterling weakened in response to poorer economic performance. He said a weaker exchange rate would be a better means of coping with the imbalances in the economy between buoyant consumer demand and the struggling manufacturing sector.