Central banks prepared to cut rates, says George

The world's central banks will cut interest rates if the outbreak of war with Iraq threatens to torpedo the economic recovery, Sir Edward George hinted yesterday.

The Governor of the Bank of England said a prolonged war could have a severe "negative impact" on the global economy.

"I think the message is that we will need to be extremely vigilant and be prepared to respond if the risks begin to crystallise," he said after chairing a meeting of central bankers from the Group of 10 wealthy nations.

"There's not a great deal we can do to anticipate that kind of risk. We can only react to it as it happens."

Sir Edward said he believed that rates were currently "accommodative" – set at the right level to encourage growth – but added that most banks had room to cut them further.

"If the expansion of the world economy was even more sluggish than assumed in our central view, then we would have to ensure that monetary policy remained accommodative," he said.

The central bankers, who included the heads of the US Federal Reserve, the European Central Bank and the Swiss National Bank, said that recovery was "slow but steady".

They expressed relief that Opec, a cartel of 10 oil producing nations, had agreed to increase production at an emergency meeting on Sunday.

"We're all conscious of the oil price ... but Opec can't anticipate any more than we can the implications of potential war in Iraq, so there's not a lot they can do," Sir Edward said.

The oil price recently hit a two-year high above $33 in New York on a combination of fears of a Middle East conflict and a five-week strike blocking exports from Venezuela.

After an initial small fall yesterday, the price of benchmark Brent crude oilended above $30 a barrel again as traders focused on mounting tension over Iraq.

Economists fear a sustained rise in oil prices would push the world back into recession. Yesterday Oxford Economics Forecasting, a think-tank, said a prolonged war in the whole Gulf region could push the oil price to $80 a barrel.

Official figures yesterday showed spiralling oil prices had pushed up British industry's raw materials bill last month by the fastest rate in more than two years.

Input prices for UK factories jumped by 2.8 per cent in December, thanks mainly to a 17 per cent surge in petrol and oil products. This was the largest rise since May 2000.

Businesses were able to pass little of the impact on to their customers. Output prices rose by just 0.1 per cent in December, the Office for National Statistics said.

While this was good news in terms of inflationary pressures from the factory floor, analysts said it meant further grief for corporate profits. John Butler, UK economist at HSBC, said: "Any sustained increase in commodity prices could provide further bad news for manufacturers' profit margins at a time when demand remains stagnant."

Official figures published later today are expected to show output in the manufacturing sector declined in November for the fourth month in a row.