Sir Eddie hints at rate cuts

The governor of the Bank of England, Sir Eddie George, yesterday signalled that borrowing costs are likely to fall further in coming months to prevent the slowdown in the world economy dragging Britain into recession.

As official figures showed inflation last month fell back below the government's 2.5% target, Sir Eddie said that with few signs of price pressures on the horizon, the Bank was prepared to offset the slowing world economy by pumping up consumer spending.

"Doing what we can to encourage domestic demand growth to compensate for the global economic weakness is certainly preferable to an unnecessary slowdown in the economy as a whole," he told an audience in Swansea. "That is the path that we must, for the time being, continue to pursue." He said the terrorist attacks could not have come at a worse time for the global economy and it could take two to three years to return to its previous rates of growth.

"The UK cannot be wholly immune from a more pronounced or prolonged global slowdown in the short term than we had previously expected - even though we are better placed than some others to withstand it."

The Bank's monetary policy committee has cut base rate twice since September 11 to 4.5%, and analysts said last month's fall in the underlying inflation rate left the door open for further cuts.

Inflation excluding mortgage interest fell to 2.3% last month, according to the Office for National Statistics after a blip above the government's target to 2.6% in August. The headline rate fell to 1.7% from 2.1% the previous month.

Cheaper petrol and a smaller than usual rebound in clothing prices after the summer sales were the main contributors to last month's fall. Further downward effects came from leisure services, with the cost of theatre tickets, evening classes and foreign holidays rising by less than a year ago.

"This drop reflects general weakness, which supports our view that inflationary pressure is currently a secondary issue," said John Butler, UK economist at HSBC. "Current inflation is not a constraint on the MPC and will allow further room to manoeuvre in the next few months."