George hints that further cuts may be needed

EDDIE GEORGE, Governor of the Bank of England, said the strength of the pound had allowed interest rates to be cut, echoing the signal in the Bank's Inflation Report that further rate cuts might be needed. But the cost of borrowing would have to rise at some point if sterling weakened as much as the Monetary Policy Committee expected, Mr George warned in a speech in Macau.

The pound weakened yesterday after reports that officials are drawing up plans for the UK to enter the single currency after a referendum at an exchange rate well below the current level.

Sterling's index against other currencies fell by 0.4 to 104.1 yesterday. It ended slightly lower against the euro at 66p.

Mr George said the pound's appreciation had dampened prices. "Monetary policy accordingly needed to be less restrictive than would otherwise have been appropriate." The aim had not been to bring the pound down but to offset its deflationary impact. But he added: "When the exchange rate weakens - as we anticipate it will in due course - then monetary policy will at some point need to offset that influence in the opposite direction."

The Government would like to see the pound fall well below its current level before the time comes to commit Britain to the single currency, probably in 2001. The existing members would be unlikely to accept British entry at an exchange rate far below the market level.

However, it will present the Government with a major headache if the pound does not fall on the currency exchanges in the meantime. Michael Saunders, an economist at Salomon Brothers, said that if talking down the pound did not work, business might start to doubt the benefits of membership.

In his speech, at a conference on central banking, Mr George said it was not possible to target the exchange rate as well as stabilising the economy. The two aims were inconsistent, as had proven during Britain's membership of the Exchange Rate Mechanism.