MPs demand quick rate cut

MPs warned yesterday that the economy is in danger of sliding into recession unless the Bank of England abandons its hawkish stance on inflation and cuts interest rates immediately.

With global stock markets plummeting and the foot and mouth epidemic threatening to cost the economy billions of pounds, the chair of the influential Treasury select committee, Giles Radice, called for the Bank to reduce borrowing costs at its meeting next week.

"The time has come for cutting rates," said Mr Radice.

The committee accused the Bank's monetary policy committee of squeezing the economy too hard in an effort to establish its anti-inflationary credentials. Inflation has been below the government's 2.5% target for nearly two years, despite the Bank's mandate to avoid undershoots as well as overshoots.

"This may not have mattered when the risk was inflation," said Mr Radice. "Now that the downside risk is recession, they should act."

Yesterday's demand for lower borrowing costs came as another City institution slashed its forecast for economic growth. Economists at Deutsche Bank said they now expected the economy to expand by 2.1% this year, rather than 2.5% they was forecasting four months ago. A rate cut was now probable at next week's MPC meeting, they said.

"The US economy is clearly in worse shape than we forecast then, while the slowdown has spread to euroland," said Ciaran Barr, chief UK economist at the Bank. "As such, the downside risks are rapidly intensifying. In addition, the adverse impact from the foot-and-mouth epidemic could easily be at least 0.3% [off growth]."

Mr Barr said the MPC was unfairly criticised for missing the 2.5% target in the past two years, but that a persistent undershoot in the future would effectively be "sacrificing growth for inflation".

The MPs agreed that the Bank had done an impressive job in getting inflation down below target, given Britain's past record of soaring price pressures. But they expressed concern that the MPC might have been biased towards undershooting its target.

"We would therefore remind the governor of his assurance to us, in November 1998, that the MPC would be "just as ac tive, rigorous and aggressive in pursuing inflation at 2.5% if there is a balance of risks on the downside as we had been on the upside."

MPs rejected complaints from the Bank Governor, Sir Eddie George, that they had subjected new members of the MPC to personal abuse at their confirmation hearings before the committee. Mr Radice said that if MPC candidates could not take tough questions from MPs, they should not be in charge of setting rates.

"We are not looking for shrinking violets," he said. "They have to put across their message to the public, that's one of the most important parts of the job."

The committee added that interest rates could have been lowered earlier, if the Bank had changed its method of forecasting the exchange rate last year when sterling continually remained higher than it had expected.

"We question whether the MPC are learning from developments in the economy as quickly as they should," the report said.

DeAnne Julius, a leading dove on the MPC, has argued that inflationary pressures have fallen as a result of new technology.