G7 warns UK must raise rates

Brown `must keep inflation under control and maintain budget deficit reductions'

The club of leading industrial nations warned Gordon Brown, attending his first G7 summit this weekend, that the UK would need to raise interest rates and reduce government borrowing to prevent the economy from overheating.

The UK "must keep inflation pressures under control and maintain budget deficit reduction", according to the summit's economic statement. It also backed the Government's diagnosis that Britain needed to undertake reforms of the education system and welfare.

The warning about interest rates and budget policy, which emerged from the G7's normal discussion of the performance of member economies, was neither unexpected nor unwelcome to the Chancellor.

Mr Brown said: "The world's finance ministers have endorsed the agenda I am pursuing in Britain - long-term monetary stability through our reforms to the Bank of England, long-term fiscal stability and reform to raise the long-run growth potential."

These, he said, would be the key themes of his first Budget. He also hailed what he said was the G7's recognition that better education and training and welfare state reform were needed to ensure the benefits of growth reached the many and not the few.

The prospect of rising interest rates in the UK took the pound above DM2.85 to its highest since July 1992 at the end of last week.

This weekend's statement from the finance ministers, meeting as the Seven, without Russia, was generally optimistic. But US triumphalism about its extraordinarily healthy economy did not play well with the other delegations.

President Bill Clinton displayed it well in a weekend radio address: "Our economy is the healthiest in a generation and the strongest in the world, with the lowest unemployment in 24 years, the lowest inflation in 30 years, the biggest decline in inequality among our working families since the 1960s, and over 12 million new jobs."

British sources said Tony Blair had a great deal of admiration for President Clinton's record on job creation, and that the UK and US shared a common economic agenda.

However, officials from other countries indicated they were looking forward to a more constructive and detailed discussion about Europe's employment problems at the two summits to be hosted by the UK next year. A G7 jobs summit will take place in February, and the annual summit will be held in Birmingham in June.

The Prime Minister laid the ground for this yesterday, launching a discussion on how the world's richest countries should cope with the globalisation of the world economy. Britain intends to focus on specific proposals for improving employability and fostering job-creation.

The ministers meeting in Denver at the weekend said prospects for the world economy were very favourable, although most of the big economies needed further reductions in government budget deficits. Continuing non- inflationary growth was in prospect, with the German and French economies likely to improve.

The statement warned of the need for further deregulation of the Japanese economy, especially as the Japanese government has no other policy options open to it. Deregulation was the theme of the new trade accord between the US and Japan announced on the eve of the summit, with America playing an advisory role in the reform of four key sectors of the Japanese economy.

For the first time the finance ministers commented on the European single currency, saying it was important that it was underpinned by sound macroeconomic and structural policies. However, it disappointed the EU Commission, which had hoped for G7 backing for the single currency.

A separate report from the finance ministers reviewed the progress made on improving international financial supervision since the Mexican crisis exploded two-and-a-half years ago. New arrangements for funding future international rescue packages were finalised last autumn. The G7 wants further progress on co-operation between different national regulators.

President Clinton said: "Our finance ministers have agreed that we should create a global network of banking and marketing officials to monitor financial policies and police risky practices."

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