Blair set to reject calls to devalue sterling

Tony Blair will tomorrow hit back at his critics in industry and the unions, and within his own party, and reject any plan to devalue the strong pound to help manufacturers.

The Prime Minister will tell an audience of business leaders that the Government will not change its economic policy if it risks triggering economic instability.

His message, which will be delivered in a speech to the Confederation of British Industry, received prompt backing from the Bank of England. The Bank's deputy governor, Mervyn King, yesterday said the problem with sterling's exchange rate against the euro rested in Europe.

Mr Blair will tell the CBI's annual dinner tomorrow that devaluation is not on the agenda. A Downing Street spokeswoman said he would set out the Government's "core economic message and long-term strategy".

She said: "While appreciating that the strength of the pound had caused difficulty for some parts of manufacturing, the best thing for whole economy is prudent planning and a stable economy.

"The worst thing to do would be to change course on interest rates or devalue the pound for a short-term effect. No one would benefit from a sudden change of economic course."

Mr King told GMTV yesterday that the Prime Minister was "certainly right". If interest rates, currently at 6 per cent compared with 3.75 per cent in Europe, were set with the intention of bringing the pound down, business would lose out in the long term, he said.

"That would just lead us down the road of high inflation again, and in the end the need for another recession to control inflation," he said. "Stability must be the watchword of policy, and that's how we are going to set monetary policy."

Further evidence of the impact that the strong British currency is having on business comes from a CBI report published today, which reveals a surprise drop in export demand.

A survey of small and medium-sized companies found that exports fell over the last four months, defying forecasts of a rise. Business confidence also slipped back - the first time this has declined for almost a year.

Colin Perry, vice-chairman of the CBI's SME council, said: "We accept there is little government can do directly about sterling, but we hope ministers do more to ease the pressure by reducing the rising burden of red tape."

Meanwhile, the leader of the trade union movement will today challenge the Government to set a timetable for joining the European single currency as part of a strategy to drive down the pound.

John Monks, general secretary of the TUC, will say he recognises there is no "magic wand", such as devaluation, to bring down the pound. But he will add: "It does not mean we are helpless."

Mr Monks said the Government could take a lead in "brokering" a co-ordinated response with the European Central Bank and the US Federal Reserve to intervene in the currency markets. Mr King last week ruled out any immediate plans for intervention.