Cabinet denies split on sterling

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THE level of sterling emerged as a divisive issue in government amid reports that the effect of the pound's strength was raised at last week's Cabinet meeting.

A ministerial source told the Independent on Sunday that Gordon Brown, the Chancellor,came under pressure in Cabinet last week to use his influence with the Bank of England to discourage another rise in interest rates. Successive rate increases have played an important role in the rise in the pound.

The source said David Blunkett, Secretary of State for Education and Employment, interrupted a discussion on welfare reform to plead for help for a manufacturing sector being battered by high interest rates and the strong pound. He is also said to have cited the effects on industry in his home town of Sheffield, but to have gained little support from colleagues.

However, ministers last night closed ranks to deny the reports. An aide close to Mr Blunkett said: "David did not raise the issue at Cabinet last Thursday. It is up to the Bank of England to decide interest rates. It is not a matter for individual Cabinet ministers."

The Treasury also dismissed the claim, arguing that the Government could no longer influence decisions on interest rates, so a plea to Mr Brown to intervene would be fruitless.

However, there undoubtedly is concern in ministerial ranks at the level of the pound, which last week soared to its highest level since 1989, causing severe problems for exporters. Some Labour MPs blame the strong pound for redundancies. Anxiety has also spread to the trades unions, which predict tens of thousands of job losses by the end of next year unless policy is changed.

One of the Chancellor's first acts on entering office was to give the Bank of England operational freedom to set interest rates. The move was designed to protect the economy against manipulation by governments in the run-up to elections. Decisions are now taken by the Bank's monetary policy committee which has pushed up base rates - now at 7.25 per cent - amid fears of inflationary pressures in the economy, including wage rises caused by skills shortages.

But with interest rates significantly higher in the UK than in most of Europe, and anxiety over the strength of the coming European single currency - in which the pound will not participate, at least initially - sterling has soared.

The Bank committee, chaired by its Governor, Eddie George, is widely thought to be split on the issue of the next movement in interest rates. Some Bank insiders believe sterling's level will begin to decline soon after the 11 European countries due to join European monetary union announce the exchange rates at which they will join in May.

They believe that the new European Central Bank will institute a tough regime which will quickly gain the respect of the markets. Mr George is thought to be against further rate rises for the time being.

Questioned by the Treasury select committee about the strength of the currency last week, Mr Brown said: "Despite the pressures and all the temptations there are, we should not be, in any way, diverted from the long-term objectives."