Governor tells Brown not to be 'over-generous'

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The Governor of the Bank of England warned Gordon Brown yesterday not to announce "over-generous tax cuts" in today's pre-Budget report (PBR).

The Governor of the Bank of England warned Gordon Brown yesterday not to announce "over-generous tax cuts" in today's pre-Budget report (PBR).

Sir Eddie George said the public spending plans already unveiled by the Government meant private-sector demand must slow to prevent further rises in interest rates.

"There are signs that this slow down in private-sector demand growth may be beginning to happen, but that is certainly not yet assured - an overgenerous tax cut would not help," Sir Eddie said.

In a speech to the Confederation of British Industry conference in Birmingham, Sir Eddie also warned against a pre-election spending spree or tax-cutting in the Budget. "I am surprised by the billions of pounds that some commentators have suggested the Chancellor could give away," he said.

The Bank's monetary policy committee was briefed last week on the contents of the PBR by Gus O'Donnell, the Treasury's head of macroeconomic policy. The committee's next decision on interest rates is due tomorrow. It is widely expected to leave rates on hold at 6 per cent for the ninth consecutive month, but a rise a day after the PBR would be a severe embarrassment to Mr Brown.

In his speech, Sir Eddie raised the possibility that rates may have peaked but refused to give an assurance that they had. "While we can't realistically rule out further interest-rate increases, we don't rule out the possibility that the next move will be downwards either," he said.

He said the Bank was constantly looking for evidence that the relationship between growth, inflation and rates had changed because of the fierce nature of competition, the change in the labour market, the internet and the strength of the pound. "We watch it, in fact, like a dove," he said.

He said that the committee took the exchange rate into account when setting rates.

Pleas to the Bank to signal that rates had peaked were "seductive" but whether such a move would have the effect of bringing down the pound was not obvious. He said the main factor behind the strength of sterling against the euro was the single currency's weakness against the dollar.

He said the reason for this was the huge flows of capital into America by investors attracted by the strength of its economy. But he said that would reverse within the next two years. "I am confident that the fundamentals will reassert themselves and that the attraction of capital to the US will diminish," he said.

Professor Otmar Issing, chief economist of the European Central Bank, who was also at the conference, said he believed the euro was undervalued. "I am convinced that confidence of investors in the internal stability of the euro and the positive outlook for growth ... will end the phase of undervaluation and lead to a stronger exchange rate," he said.