Brown set to acccept case for rate rise

As the new Chancellor prepares to meet Eddie George, Labour sends out a positive signal on the single currency

Diane Coyle

Economics Editor

Interest rates are likely to rise after Gordon Brown meets Eddie George, Governor of the Bank of England, on Wednesday. But the new Chancellor will face intense lobbying from industry to avoid any further rate rises as long as the pound stays so strong.

A business survey published today by the Institute of Directors confirms that the squeeze on export orders due to the pound's rise is being more than offset by buoyant home orders. The employers' group says it favours an interest rate rise to head off higher inflation.

It also joins the growing consensus that Mr Brown should use his first Budget to raise taxes too - although not for the purpose of fine-tuning the economy, but rather to fill some of the holes in the public finances.

The Bank of England is firmly expected to recommend an increase of a quarter to a half point in interest rates to trim the pace of growth and keep inflation on course for the 2.5 per cent target. The Chancellor is widely expected to agree.

David Walton, an economist at Goldman Sachs, said: "Gordon Brown seems likely to accept the Bank's recommendation, not least because he will want to bring to an end the previous Chancellor's dispute with the Governor."

The City, which hopes to see further moves towards independence for the Bank of England, would be concerned if Mr Brown refused the advice.

If rates do go up this week, most lenders would raise mortgage rates by a similar amount. A quarter point rise would add about pounds 10 a month to the cost of a pounds 50,000 variable rate mortgage.

However, exporters will hope for no further increases in interest rates for fear this would drive the pound's exchange rate even higher. Some of Britain's biggest companies have become increasingly vocal in their complaints about the impact of the strong pound on business, and will be making sure Mr Brown gets the message.

British Steel is expected to make a fresh effort later this week to persuade the Government to avoid using the interest rate weapon against the threat of inflation as long as sterling is hitting export orders.

It will join the bandwagon calling for higher taxes as an alternative. In a report published this morning, Lloyds Bank says tougher policies are needed to prevent consumer spending boiling over. Economist Trevor Williams said: "The onus shouldn't just be on raising interest rates. Taxes also have a role to play."

In its quarterly survey, the IoD recommends both, but for different reasons. It argues that the state of the public finances warrants tax increases.

Stephen Davies, its economist, said: "The idea that you can fine-tune fiscal policy to compensate for the exchange rate is absolutely ludicrous. The argument for higher taxes is based on the unsatisfactory fiscal position."

Although government borrowing is falling rapidly as the economy booms, many experts believe it should be even lower to satisfy the "golden rule" the new Government has pledged to meet. This says that over the course of the business cycle, borrowing will not exceed public sector investment. Meeting it early would imply a pounds 7bn-pounds 10bn increase in the tax burden on top of future increases inherited from Kenneth Clarke's last Budget.

The IoD survey confirms the picture of a two-speed economy. It reports that company performance has increased in the latest quarter, with output up and little change in orders.

Business and non-business services are the most buoyant sectors. They reported improved optimism, and the biggest increases in output and employment. They also saw the strongest increases in costs and prices, which were stable in other sectors.

Yet export orders have fallen, and there has been a decline in business optimism. Export orders in manufacturing have been particularly badly affected.

Start your day with The Independent, sign up for daily news emails
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Graduate Application Support Analyst

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Reach Volunteering: External Finance Trustee Needed!

Voluntary post, reasonable expenses reimbursed: Reach Volunteering: Would you ...

Christine McCleave: FP&A Analyst

£36,000 - £40,000: Christine McCleave: Are you looking for a new opportunity a...

Recruitment Genius: Sales Executive - OTE £40,000

£15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

Day In a Page

Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

Climate change key in Syrian conflict

And it will trigger more war in future
How I outwitted the Gestapo

How I outwitted the Gestapo

My life as a Jew in wartime Berlin
The nation's favourite animal revealed

The nation's favourite animal revealed

Women like cuddly creatures whilst men like creepy-crawlies
Is this the way to get young people to vote?

Getting young people to vote

From #VOTESELFISH to Bite the Ballot
Poldark star Heida Reed: 'I don't think a single bodice gets ripped'

Poldark star Heida Reed

'I don't think a single bodice gets ripped'
The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn