Senior ministers said yesterday's decision by the Bank of England to hold interest rates at 5.5 per cent vindicated the Chancellor's confidence. The Bank's monetary policy committee (MPC), which had previously cut rates for five months running, had been briefed on Mr Brown's Budget arithmetic.
Ministers said last night that there was growing optimism that the downturn would be short-lived. "Three months ago, we didn't know whether we would have a hard or soft landing," a government source said. "We now know it will be soft."
However, many analysts believe the Chancellor will still be forced to scale down his forecast last November that the economy will grow between 1 per cent and 1.5 per cent this year. Mr Brown is expected to reaffirm his targets for bringing down public borrowing.
The MPC's decision disappointed business leaders and the trade unions, who had hoped for a further cut in interest rates to help exporters struggling because of the strong pound. Yesterday, sterling reached a new high against the single European currency following the Bank's announcement.
Building societies and banks left mortgage rates unchanged but the MPC decision brought some relief for savers, who had been hit by the sharp fall in rates in recent months.
Tony Blair sought to allay the fears of Labour MPs about the downturn when he addressed their weekly meeting yesterday, saying the Government was "steering a course of stability in difficult economic circumstances".
In the Commons, Mr Blair clashed with the Tory leader, William Hague, who accused the Government of bringing in "stealth taxes" amounting to pounds 40bn since the general election, "contrary to specific election promises and contrary to every statement to this House".
The Prime Minister replied that the Government had cut corporation tax and insisted the overall tax burden would rise by less than under the plans of the previous Conservative administration.
The City expects the MPC will return to cutting rates after this month's pause. The Bank is confident that the economy is in good shape to weather the downturn.
Kate Barker, chief economic adviser at the Confederation of British Industry, said rates would have to come down another half-point if the MPC was to avoid undershooting the Government's 2.5 per cent inflation target.
Roger Lyons, general secretary of the MSF union, said: "The MPC is gambling with thousands of quality jobs in the manufacturing sector. This is a bitter pill for manufacturing to swallow."
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