Inflation switch 'to cut rates

Chancellor Gordon Brown's plan to adopt the measure of inflation used in the Eurozone - which could be announced as early as next week - will require an immediate UK interest rate cut, say City economists.

Brown may announce the change on 9 June, when he delivers a mainly negative assessment of his five tests for UK membership of the single currency.

The City is anxious to point out that the move is far from technical and would have serious economic consequences.

'If they pick the ECB target of 2 per cent, that's 50-75 basis points of [interest rate] cuts straight away,' said John But ler, UK economist at HSBC.

The Eurozone's measure of inflation, known as the harmonised index of consumer prices (HICP), has been studied by the Treasury since the Budget. Last month Brown said that there was a case, in principle, to adopt the target.

But there are some significant differences from the present UK measure, the retail prices index excluding mortgage interest (RPIX).

This now puts UK inflation 1 per cent ahead of that in the eurozone. The current British measure, takes account of housing costs and exceeds the euro measure by 1 per cent.

The change could be implemented in September, the month when the Office for National Statistics will move to the Eurozone measure for GDP growth.