Interest rate hopes get a double boost

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HOPES THAT interest rates could fall yet again got a double boost yesterday as inflation dropped below the Government's target and the Organisation for Economic Co-operation and Development (OECD) cut its forecast for UK growth this year.

The Paris-based organisation predicted, in its half-yearly forecasts, that UK interest rates would fall to 4.5 per cent next year. "Monetary policy should continue to use the available room for manoeuvre," the report said. It added that the economy would grow 0.7 per cent instead of 0.8 per cent this year, rising modestly to 1.6 per cent in 2000.

These forecasts, weaker than the Chancellor's, reinforced the message in yesterday's inflation figures. Headline inflation fell to 1.6 per cent in April from 2.1 per cent, its lowest since November 1993. Underlying inflation, which excludes mortgage costs, fell to 2.4 per cent, below the Bank of England's target of 2.5 per cent. It is only the second time since the Bank's Monetary Policy Committee (MPC) won the power to set rates, in May 1997, that inflation has fallen below its target, which Gordon Brown reconfirmed last night.

Some City analysts said the news had reopened the door to further interest rate cuts after recent signals to the contrary from the Governor of the Bank of England and his deputy. But others were simply relieved the UK had not shown any sign of following the US, which last week reported its highest inflation rise for nine years.

In its forecast, the OECD said the global economic situation had improved. The 29 member countries will grow by 2.6 per cent this year, it said, little changed from 1998's 2.7 per cent despite the financial crisis.

The United States would slow down, with no immediate need for higher interest rates, but in Japan, "the outlook remains bleak", the report said. It had little cheer to offer Japanese policymakers.

The OECD report also called for tighter government budgets, and structural reform in Europe was backed up yesterday by an outspoken monthly report from the European Central Bank. It criticised euro member governments' plans to cut budget deficits as "inadequate" and with "scant safety margins".