Brown backs rise in interest rates to check pay claims

Gordon Brown has given a clear signal that he will back the Bank of England if it decides to raise interest rates to keep inflation on target.

Gordon Brown has given a clear signal that he will back the Bank of England if it decides to raise interest rates to keep inflation on target.

The Chancellor made plain he would support the Bank's Monetary Policy Committee if it votes to increase the cost of loans in response to excessive pay claims. Mr Brown said the MPC would have to act if it thought dearer loans and mortgages were needed to hit the inflation target.

"Unacceptably high wage rises will not therefore lead to higher inflation but to higher interest rates. It is in no one's interest if today's pay rise threatens to become tomorrow's mortgage rise," he said in a speech in London last night.

The Chancellor's backing for the Bank is likely to prove significant during the next few months, although he was careful not to say he thought higher rates were inevitable.

The MPC is to meet early in two weeks, amid signs that the economy is expanding fast enough to pose a threat to hitting the inflation target in future. Economists think a decision to raise interest rates from the current 5.25 per cent level is very likely, although the committee itself is split.

But the move would be highly controversial, with headline inflation rate at a 36-year low. Manufacturers and unions have also blamed the Bank for keeping the pound too high through its policies.

Mr Brown said: "Those who today are arguing that economic stability comes by opposing necessary changes in interest rates and by avoiding the tough decisions necessary to meet the inflation target would risk returning to the boom and bust of the past."

He said low inflation was essential for a return to full employment. "We can achieve high and stable levels of employment and meet our inflation target. Indeed we will not achieve and sustain full employment for the long term by failing to meet our inflation target."

The speech fleshed out his Labour Party conference pledge to take Britain back to full employment for the first time in a generation.

Many businesses insist there is no danger of earnings accelerating out of control, and no need to increase interest rates. The Engineering Employers' Federation said pay bargaining had been restrained, with settlements at the low level of 2.4 per cent.

Dave Prentis, deputy general secretary of Unison, said: "Public sector workers have had enough of pay restraint over the past 20 years. We want the Government to act responsibly by unlocking the straitjacket of pay curbs and pay public sector workers decent wages."

Yet official figures last week showed underlying average earnings growth climbing sharply to 4.9 per cent in the three months to August, too fast to be consistent with the 2.5 per cent inflation target if it lasts.

The Chancellor repeated his warning that there will be no relaxation in fiscal discipline. His speech set out three other conditions for full employment in addition to economic stability: a strengthened welfare-to-work programme, responsibility in pay and higher productivity.

Policies to boost productivity will be the theme of the Pre-Budget Report on 9 November, Mr Brown announced.