Davies warns on inflation control

Low inflation must remain Britain's top economic priority whether or not sterling enters a single European currency in 1999, Howard Davies, deputy governor of the Bank of England, stressed yesterday.

Mr Davies also indicated that there was a strong case for giving the Bank independent status irrespective of whether Britain fully embraced economic and monetary union.

Whatever the outcome, it was essential that Britain was prepared and that meant, above all, keeping a tight control over monetary policy and inflation.

"In principle, the UK could prosper outside or inside. Our prosperity depends on the competitiveness of our businesses which, in turn, depends crucially on our productivity across the whole economy. We believe that that productivity can best be developed most effectively in an environment of low inflation," he told delegates to the BCC's annual conference.

If sterling were part of a single currency, it would put evengreater emphasis on industry to control costs because devaluation would not be an option to shield uncompetitive companies.

If Britain did not switch to the euro then there would be an even greater obligation on it to achieve lower inflation because of the interest rate premium it would otherwise have to pay.

"Some argue that this points to the need for establishing independent status for the Bank outside the euro area, just as such a status is required by the treaty inside it. There may well be strong arguments for that. I couldn't possibly comment."

Mr Davies said the Bank believed some countries would have the "greatest difficulty" in meeting the convergence criteria but that some form of EMU involving a core group was likely.

The Bank stood ready, he said, to give practical advice to the business community on the transition to single currency because "in or out we may all have to learn to live with the euro".