Brown throws his weight behind MPC

Gordon Brown yesterday dropped a broad hint that further interest rate increases may be needed to head off rising inflationary pressures, despite an unexpected drop in the government's preferred measure of inflation last month.

The chancellor told the CBI's conference in Birmingham that he fully backed the Bank of England's decision earlier this month to increase the cost of borrowing to 3.75%, its first upward move in nearly four years.

City analysts are pencilling in further increases but said the next move could be postponed until the new year, after official figures showed inflation eased last month. The underlying rate, which excludes mortgage interest payments, fell 0.1 percentage points to 2.7% last month, the Office for National Statistics reported.

David Page, economist at Investec, said: "There has been some excitable speculation that the Bank's monetary policy committee might act immediately after the November hike by raising interest rates again in December. I think this just showed that the MPC will not be in any need to rush."

The slowdown in the housing market this year and cheaper foreign holidays helped to peg back underlying inflation, the ONS said, but the measure which strips out mortgage interest costs, has now been above the government's 2.5% target for a year.

Mr Brown noted that the Bank had been quick to cut rates when the economy slowed after the collapse of the stock market bubble.

"It is because we are committed to delivering the stability industry needs that the same proactive approach is being pursued as the economy strengthens.

"Let us remember that in 1988 as the economy started to accelerate the then government cut interest rates, fuelling an inflation that eventually led to a deep recession."

The chancellor said the Bank's recent decision - criticised by some analysts as premature - had been taken to ensure the continuation of stable growth. "I believe that the monetary policy committee is right to take the forward-looking approach of pre-emptive action - taken as the economy strengthens - to lock in stability."

Although the housing market has picked up over the last few months, prices are rising more slowly than last autumn. Analysts expect the housing costs component of the retail prices index to ease further which could bring inflation back below the government's target by early next year.

Mr Brown dismissed speculation that the rising budget deficit - likely to climb well above £30bn this year - would force him to dilute one of his two fiscal rules, that the government should only borrow for investment over a complete economic cycle.

"At all times we will meet our fiscal rules and, more than that, in [next month's] pre-budget report we will publish plans showing that... our fiscal position is sustainable over not just a year or two ahead but over the next decades."

Mr Brown said that where there was no credible commitment to fiscal stability over the economic cycle "economies can find themselves in the perverse position of cutting spending or raising taxes at the wrong time in the economic cycle, putting growth and stability at risk".

A treasury spokesman said the comment should be taken as a sign that the government had no need to raise taxes or cut spending in next year's budget, and no intention of doing so.

Mr Brown told the CBI that he would be proposing a range of supply-side measures in the pre-budget report to lock in economic stability, including moves to cut red tape and provide incentives for local government to stimulate growth.