Brown and Bank at odds on rate cut

PRESSURE ON the Bank of England to cut interest rates intensified further last night after the chairman of the Federal Reserve, Alan Greenspan, indicated that rates in the United States would come down again to combat the threat of a global economic downturn.

The Bank's Monetary Policy Committee will announce its decision at noon today amid reports that it is furious at the Treasury's attempts to bounce it into a rate cut.

The stock market was yesterday treading water ahead of today's decision from the Bank, the most important since Labour gave it control over interest rates in June last year.

Most City economists expect rates to be cut by at least a quarter of a point to 7.25 per cent but industry is lobbying for a half-point cut to avert a full-blown recession.

Mr Greenspan's comments to a business audience in Washington could tip the balance. He said the prospects for the US economy next year had deteriorated measurably.

In a message to other economies he said: "This is a time for monetary policy to be especially alert. We are clearly facing a set of forces that should be dampening demand going forward to an unknown extent."

The Chancellor, Gordon Brown, last night tried to cool the row between the Treasury and the Bank, which worsened on Tuesday night after Mr Brown slashed his UK growth forecasts for next year. The move was viewed as a clear attempt to influence the Bank's decision on interest rates.

But Mr Brown said yesterday: "We made the Bank of England independent ... and I will back them in the decisions they make this week."

Mr Brown and the Prime Minister sought to calm jitters by calling for supporters to "hold firm, keep our nerve".

Senior ministerial sources said that the Chancellor would raid surpluses, amounting to pounds 30bn over the next three years, to plug the gap caused by the fall in expected growth which could slash expected tax receipts while rising unemployment could push up the welfare bill. "We won't cut spending. There were surpluses in the figures, and we will use those," said one senior source.

Tony Blair, speaking yesterday during his visit to China, said there would be "no backing down". The Prime Minister said: "We have to stick to policies that provide stability for the long term and ensure we never go back to the wretched days of boom and bust, record repossessions, record bankruptcies, record borrowing and interest rates at 15 per cent."

The Chancellor's announcement to cut the forecast growth from 1.75 to 2.5 per cent to 1 per cent could put at risk Labour's manifesto commitment to cut waiting lists and class sizes. But Mr Brown made it clear last night that he would not cut the pounds 40bn extra allocated to health and education in his July comprehensive spending review.

"Our spending plans are prudent; they were based on very cautious and prudent assumptions and will stand the test of time. Those people who want us to change the spending plans are those who always wanted us to cut health and education and that we will not do," Mr Brown said.

The Chancellor may also have to raise taxes, which could be signalled in next month's pre-Budget statement. He has pledged not to raise income taxes, but an energy tax on the electricity generators which could raise pounds 5bn over three years is being seriously considered.

Some Labour MPs fear the worst is yet to come. "It is going to be very rocky. If Gordon goes back on his spending plans, it could fatally damage him," said one.

Francis Maude, the shadow Chancellor, drew comparisons with the last Labour government's International Monetary Fund-inspired spending cuts in 1976, and said the downturn in growth had punched a "pounds 15bn black hole" in the Government's finances.