George backs Chancellor on borrowing

Sir Edward George, threw his weight yesterday behind government plans to allow the public coffers to go further into the red because of the economic downturn.

The Governor of the Bank of England said it would be "more sensible" to let borrowing rise than to cut public spending or raise taxes. His comments came ahead of today's pre-Budget report in which the Chancellor is expected to show he has decided to relax borrowing rules in the short term. Sir Edward, who was appearing before the Treasury Select Committee with other members of the Bank's Monetary Policy Committee, also indicated interest rates were unlikely to fall further. He said that "if the world were to evolve as in our central view" it would be "reasonable" to think interest rates have bottomed at 4 per cent, their lowest point in 38 years.

Sir Edward told MPs that, despite not having changed interest rates for 12 months, the MPC had not "gone to sleep" and would lower rates if the global economy suffered a dramatic setback. MPC members have issued increasingly strident warnings that the soaring inflation of house prices is not sustainable, the chief reason why the body has resisted cutting rates so far this year.

Charles Bean, the Bank of England's chief economist, said on Monday the Bank was "consistently surprised" by the strength of house price inflation.

Sir Edward attempted to calm nerves about a possible slump, telling the committee: "My view is that we will see house price increases for a while and then moderating to zero, or maybe minus a bit in some parts of the country in the next couple of years. What we are not saying is that house prices are about to crash."

Sir Edward reiterated his concerns about the damage the firefighters' demand for a 40 per cent pay increase might do to the economy. He said it could lead to "a generalised push on inflation, starting in the public sector but spreading into the private sector too."