Sir Eddie hints at rate cut

Sir Eddie George, governor of the Bank of England, dropped a broad hint last night that interest rates could be cut in coming months to prevent the turmoil in financial markets killing off the global recovery.

Despite a further big rise in share prices on both sides of the Atlantic, Sir Eddie said the summer meltdown on the markets had shifted the debate "back to the possible need for the further monetary stimulus".

Government figures out yesterday showed that Britain's underlying inflation rate rose to 2.1% in September but remained comfortably below Gordon Brown's 2.5% target for the eighth month in a row.

Sir Eddie, speaking to the Northwest Development Agency, said the significant issues for the Bank's nine-strong monetary policy committee were the strength of the global recovery, the sustainability of household spending and the danger that confidence-building cuts in rates now could lead to a further explosion in household borrowing.

The FTSE index of London's leading shares closed more than 198 points higher at 4130.3 last night, boosted by another strong performance on Wall Street where the Dow Jones industrial average was up by more than 275 points at lunchtime.

Sir Eddie said that over the summer the MPC had been contemplating higher interest rates to choke off the growth in domestic demand if there were no signs of it moderating of its own accord.

"But we had not reckoned with the further nervous breakdown suffered by international equity markets in the summer," he said.

The Bank's governor said the sharp falls in equity prices "have given rise to concerns about the strength of business and consumer confidence, and to doubts as to the sus tainability of the global recovery".

City analysts said yesterday that, despite the losses to household wealth caused by the three-year bear market in equities, consumer demand in the UK was holding up well and feeding through into higher prices, particularly in the service sector.

The detailed breakdown of latest inflation figures from the office for national statistics showed that prices in the service sector rose by 4.8% in the year to September, the fastest rate of increase for almost 10 years.

Service sector inflation was, however, partly offset by con tinued falls in the price of goods. These were 0.9% lower in September than a year earlier.

The headline rate of inflation rose last month from 1.4% to 1.7% but the harmonised measure of the cost of living - which strips out housing costs to allow for international comparisons - remained 1.1%, the joint lowest in the European Union.

The ONS said the main factors pushing up prices were housing, clothing and footwear, fuel and food.

David Page, UK economist at Investec, said the Bank was likely to lower its forecast for inflation next month when it conducts its quarterly assessment of the economy and would cut rates as an insurance policy against a period of below-target inflation.

But Ross Walker, UK economist with the Royal Bank of Scotland, warned that underlying inflation could be back above the target as soon as next month.