Bank throws industry rate cut lifeline

Britain's hard pressed exporters were thrown a lifeline by the Bank of England yesterday when its nine-strong monetary policy committee responded to the strong pound with a resumption of base rate cuts after a one-month pause.

The Bank's governor, Eddie George, admitted last night that the MPC was caught in an interest rate dilemma, with the sheltered domestic economy doing well while firms exposed to ferocious global competition were suffering.

While insisting that it was the Bank's job to keep inflation at 2.5% rather than set a target for the exchange rate, Mr George revealed that the reduction in base rates yesterday from 5.25% to 5% was indeed prompted by the exchange rate.

The seventh cut since last October brought rates to a level not seen since Jim Callaghan's government was also trying to cap sterling's strength in 1977.

Mr George told the City's elite at the Mansion House that the Bank could not respond "Pavlov-like" to exchange rate fluctuations.

"But we can, and do, aim to offset the impact of persistent external influences on the prospect for inflation so that inflation in the economy as a whole stays on track to meet the inflation target given to us by the chancellor.

"That is what we have been doing - and is the context of our further move today," said Mr George.

In his speech, the chancellor, Gordon Brown, made it clear that there was no question of the government adopting an exchange rate target.

Mr Brown said he understood the concerns of exporters, but added: "Anyone who thinks that dropping the inflation target to replace it with an exchange rate target, or running inflation and exchange rate targets at the same time is the right way to achieve domestic stability or convergence is failing to learn the lessons of the 1980s. We would end up with neither stability nor convergence."

Interest rates in Britain remain twice those in the single currency zone, where the weakness of the economy has been a prime reason for the stuttering state of the euro.

Mr George said that the single currency would strengthen against sterling as Euroland growth picked up. City analysts were divided on whether the cut would be the last in the cycle. Eleven of 20 economists polled by Reuters agency predicted that the next move in rates would be up, while nine expected further reductions.

Yesterday's reduction, however, was warmly greeted by both sides of industry. Roger Lyons, general secretary of the Manufacturing Science and Finance union, said the cut had saved thousands of jobs across the country.

The Confederation of British Industry said the MPC had made the "right decision", but warned that rates may have to be put on hold while the full effects of the earlier reductions worked their way through.

? The City's lord mayor, Lord Levene of Portsoken, urged European firms and financial intitutions to work together to fight laws which have the potential to affect business in the European community.

Referring to disagreements between the City and the rest of Europe about requirements for a withholding tax and a takeover directive, he said the government should not have to use its veto repeatedly over potentially harmful changes.