Brown backs rise in interest rates as IMF endorses growth forecasts

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The Independent Online

Gordon Brown dropped a heavy hint yesterday that he wants to see an increase in interest rates to lock in economic stability, even though inflation is way below the target set by the Government.

Gordon Brown dropped a heavy hint yesterday that he wants to see an increase in interest rates to lock in economic stability, even though inflation is way below the target set by the Government.

Addressing the British Chambers of Commerce annual conference, the Chancellor praised the Bank of England for its "decisive" action in raising rates pre-emptively twice in the past six months, adding: "I can assure you that having had the strength to make the difficult long-term decisions after 1997 we will continue to have the strength to take the long-term decisions that put stability first now and in the future, supporting our monetary authorities in the difficult choices they have to make."

His comments came as the International Monetary Fund gave a glowing assessment of the UK's prospects, forecasting that its economy would grow at 3.5 per cent this year - twice the pace of growth in the recession-bound eurozone and right at the top end of the Treasury's own once-derided projections.

A majority of City economists meanwhile said UK rates would need to rise in due course, even though the minutes of the latest meeting of the Bank's Monetary Policy Committee revealed that it voted eight to one to keep the cost of borrowing on hold at 4 per cent earlier this month. Only Andrew Large, one of the two deputy governors, voted for a quarter-point increase in rates.

The unexpectedly decisive vote eased fears of rapid rises in interest rates and caused the pound to fall. Some analysts said the language in the minutes of the April meeting was very "dovish" and could even undermine forecasts for an interest rate rise when the MPC meets early next month. However, the majority said rates would need to rise "in due course" but added that so far it did not appear necessary to raise them any faster than had been implied by the February inflation report.

The minutes showed the MPC members were also worried about the continued strength of the pound, which had offset the inflationary impact of strong house price growth, and the failure of the two quarter-point increases, in February and last November, to have any "noticeable" effect on consumer spending or confidence.

Furthermore some members said the risks of further falls in inflation - which dropped to 1.1 per cent in March according to figures on Tuesday - had increased in the wake of growing signs that the euro area is struggling to emerge from recession.

"There is more uncertainty now over the outcome of next month's meeting," said Philip Shaw, the chief economist at Investec in London. "Even so the strength of the economy suggests that a rise to 4.25 per cent is likely. The issue appears to be one of timing."

The IMF's assessment of the British economy amounts to a huge publicity coup for Mr Brown. In a verdict that will delight the Chancellor's eurosceptic allies, the IMF's World Economic Outlook said: "In contrast to the euro area, macroeconomic performance in the UK remains strong ... due not only to appropriate monetary policy but also reflecting the deep reforms of labour product and financial markets."

Nevertheless, the fund also warned that a crash in house prices and a public finance crisis on the back of runaway government spending could still undermine Britain's otherwise outstanding economic achievement. It urged the Chancellor to slow his plans to inject billions of extra cash into education, health and law and order.

"Moderating the ongoing steep escalation in government spending would limit the risk of inefficiencies and help fiscal consolidation," it said.

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