Inflation figures 'open way for early rate cut'

DIANE COYLE

Economics Correspondent

Inflation is unlikely to fall much further, William Waldegrave, Chief Secretary to the Treasury, told MPs yesterday. "We don't think it's going to come down very much more. It's getting very low," he told the Treasury Select Committee.

His remarks followed figures showing that inflationary pressures were receding. Analysts said that a slowdown in factory gate price rises last month has cleared the way for Chancellor Kenneth Clarke to cut base rates after his meeting tomorrow with Eddie George, Governor of the Bank of England.

''Economic conditions would make lower interest rates a prudent measure at the moment. It would not be a gamble,'' said Sean Shepley, an economist at investment bank CSFB. Many City economists expect a small cut in interest rates after tomorrow's meeting. Others think it will be postponed until the new year - particularly after Hans Tietmeyer, Bundesbank president, played down hopes of an imminent fall in German interest rates.

Lower interest rates in Germany and the US, making it easier for Britain to follow suit, are expected in the next few weeks. But the Bank of England is expected to advise against an early move - raising the spectre of a re-run of the Governor's earlier disagreement with the Chancellor.

The annual rate of increase in factory gate prices declined to 4.3 per cent in November, while earlier figures were revised down. Although year- on-year increases in paper and plastics prices remained high, they were much lower than earlier in the year. Computer prices fell 4 per cent in the year to November.

There was an encouraging drop in ''core'' output price inflation, excluding food and fuel. Its annual rate of increase in the latest three months - an indicator emphasised by the Bank of England - fell from 4.0 per cent to 3.4 per cent in November. Prices for materials declined slightly during the month, after adjusting for seasonal increases in food and fuel costs. Since the start of the year the annual rate of input price inflation has nearly halved, to 6.2 per cent, and has reached its lowest since August 1994.

The earlier alarming bulge in materials prices has been reversed, but economists at brokers Hoare Govett say that the fall has been driven by lower fuel prices. The year-on-year increase in ''core'' imported materials prices is still running at 14.5 per cent.