Rate setters are split over strong pound

THE BANK of England said yesterday that the economy is heading for faster growth with low inflation. But its quarterly Inflation Report confirmed that the Monetary Policy Committee was split over the strong pound, keeping alive the prospect of further interest-rate cuts.

Mervyn King, the Bank's deputy governor, said: "The outlook is not so much for a soft landing as a gentle take-off." The Bank's new forecast for growth was more optimistic.

However, he described the rise in sterling since February as the "single most important development" in the economy.

The report concluded: "If sterling does not decline, then, depending on other developments in the economy, further easing of monetary policy might be needed to prevent undershooting of the inflation target."

The pound strengthened yesterday, its index ending 0.2 higher at 104.1. The sacking of Yevgeny Primakov, the Russian prime minister, undermined the euro early in the day, while the resignation later in the day of Robert Rubin, the US Treasury Secretary, sent the dollar sharply lower.

Aside from uncertainty on the exchange rate, however, the report was upbeat. "Prospects for the world economy look a little brighter," said Mr King. "It is some time since one could say that," he added, referring to last year's global financial crisis.

At home there has been an increase in confidence across all sectors of the economy. Pay pressures are weak and the strong pound is bearing down on prices, the report said.

A majority of the MPC thought there was a possibility of a faster decline in sterlingthan the modest fall assumed in the Bank's forecast, posing a risk of higher-than-expected inflation. But Mr King said: "Some Committee members see greater downside risks to inflation from a stronger exchange- rate profile and also from weaker world activity."

He would not say what level the MPC thought the pound ought to be. "That would give the impression we have an exchange-rate target. We do not. The only target the MPC has is the inflation target."

However, City analysts were clear the MPC thinks sterling is too high. Steven Bell, chief UK economist at Deutsche Bank, said: "They are impaling themselves firmly on the exchange-rate hook. We don't know when, but they will have to cut interest rates if the pound does not go down."

However, many analysts do not believe the pound will fall back to its mid-1990s levels, as exporters hope. Kevin Gardiner at Morgan Stanley said the right level was probably higher than in the past. "The UK's economic performance is better relative to the rest of the OECD than it has been in living memory," he said.

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