Treasury sees mixed signals in economy

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NORMAN Lamont yesterday sought to lower hopes of a fresh cut in interest rates after declaring there were 'encouraging signs' of life in the economy and an improvement in business optimism.

The Chancellor's comments coincided with the Treasury's first published report on monetary conditions, which contrasted 'timely' indications of an upward trend in retail sales, car registrations, exports and imports against the prospects of a fresh round of job losses, weak consumer confidence and fears of contracting factory output.

Mr Lamont gave a clear indication he would not risk another early cut in rates. 'Three percentage points off interest rates in just about a couple of months; that is a huge relaxation in policy and much of that is still to feed through,' the Chancellor told Radio 4's The World at One.

Mr Lamont said his contacts with business and industry revealed 'a considerable increase' in optimism, though 'we have had false dawns before'.

His remarks pushed shares into retreat and the FT-SE 100 index closed at 2726.5, off 24.4.

Although the pound has recovered some ground in recent days, the Chancellor said the fall since September could not be ignored.

The Bundesbank's decision yesterday to leave its key interest rates unchanged reinforced the view that a further cut in UK rates was unlikely until early spring.

The Treasury's new monthly report is part of a campaign to open up economic policy making, including this week's appointment of a seven-man panel of independent economists to advise the Chancellor, following the pound's forced departure from the European exchange rate mechanism.

The report also underlined the strong rise in narrow money supply, M0, and a sharp increase in broad money. But the 45-page document was largely a description of recent economic statistics rather than an analysis that could provide clues to future interest rate decisions, and drew a lukewarm reaction from the City.

Leading article, page 18

Rate hopes dashed, page 22