Economy wins a double boost

In a double boost for the Government yesterday, the Bank of England said the Chancellor of the Exchequer was on course to meet his inflation target as new figures showed a sharp fall in unemployment to its lowest level for nearly five years.

The Bank's more optimistic new inflation forecast, showing the Government is now more likely than not to meet its 2.5 per cent target, raised City hopes of another cut in the cost of borrowing in March. Its latest Inflation Report marks the first time for a year that the Bank and Kenneth Clarke, the Chancellor, appear to have been in complete harmony.

The figures raised morale among Tory MPs and ministers, braced for attacks over the Scott report today. Downing Street hailed the figures as "very encouraging all round". The Prime Minister's office said unemployment had peaked and contrasted Britain's jobless total with those for France (3 million), Germany (4 million) and Italy (2.75 million).

However, Tony Blair cast cold water on the figures last night. The Labour leader told the British Retail Consortium the Bank of England inflation report was "worrying". He said it pointed to poor performance in investment and exports, and warned that "unless we do better, our chances of keeping inflation under control and securing growth are at risk".

But Mr Clarke said yesterday: ''There is no reason why Britain should not be able to maintain growth with low inflation.''

Most City analysts predicted a quarter-point cut in base rates to 6 per cent after the next monetary meeting on 7 March. ''You can hear Ken Clarke revving the engines. There is nothing in the Bank's Inflation Report to stop him cutting interest rates,'' Paul Mortimer-Lee, chief economist at investment bank Paribas, said.

Simon Briscoe, an economist at City bank Nikko Europe, said: ''The Chancellor is either right or lucky. He has the politically important fall in unemployment and barely a whiff of any inflationary pressure.''

There was an unexpectedly big fall in unemployment in January - the 29th in succession. The number of people claiming unemployment benefit fell by 29,300 to 2,206,000, the biggest decline in just over a year. But underlying average earnings growth was unchanged at 3.25 per cent in December.

The Bank has revised down its forecast of inflation during the next two years and its Inflation Report yesterday concluded that it is ''a little more likely than not that inflation will be somewhat below 2.5 per cent in two years' time''.

Mervyn King, the Bank's chief economist, denied the more optimistic forecast was a green light for further cuts in the cost of borrowing. He said: ''Our conclusion hardly sounds to me like a clarion call for substantial cuts in interest rates.''

However, the City pounced on the word ''substantial'' as a signal that the Bank would not oppose further modest reductions in base rates. ''This is a significant change of view,'' Geoff Dicks, chief UK economist at NatWest Markets, said.

Mr King said the rate cuts in December and January were consistent with the inflation target. The Bank is thought to have opposed the January move.

Mr Clarke told BBC Radio he would continue to set policy month by month. "It's the duty of central bankers not to get over-excited."