George sees little room for rate cuts

EDDIE GEORGE, the incoming Governor of the Bank of England, said yesterday that the Government and the Bank saw 'little justification and very little room' for another cut in interest rates.

As the pound slipped to a fresh record low Mr George used his first key speech as Governor-elect to reassure the markets that the Prime Minister would not overrule the Bank and Treasury to pursue economic recovery at the cost of resurgent inflation.

'I do not know of anyone involved at any level in the process of monetary policy decision-making or its implementation who does not share the conviction that price stability is a necessary precondition for sustainable growth of output and employment', he told the British Chamber of Commerce in Frankfurt.

The authorities could not be complacent about the falling pound because of the potential boost to inflation, he said.

Sterling has dropped by 16 per cent since Britain left the European exchange rate mechanism in September, triggering a sharp rise in import prices and the cost of industry's raw materials.

'There can be no question of benign neglect in relation to the exchange rate,' Mr George said.

But he added that sterling's weakness need not threaten the Government's inflation target because companies' costs were well under control. The Bank believes that firms have scope to absorb upward pressure on prices by cutting their profit margins.

Mr George said the pound could start to rise again as the gap between German and British interest rates narrowed. But Hans Tietmeyer, deputy president of the Bundesbank, said at the same meeting that the 'time was not ripe for sounding the all-clear on German monetary policy'.

The pound lost almost a pfennig against the mark yesterday to close at DM2.3510 and shed three quarters of a cent to end at dollars 1.4190. Against a basket of currencies it fell 0.4 points to close at 76 per cent of its 1985 value.

Leading analysts were not convinced by Mr George's hard line. 'I retain my scepticism,' Ruth Lea of Mitsubishi Bank said.

'The Bank does not have much power. If political pressure mounts on Major and Lamont because the economy is not recovering, they will cut rates again'.

John Shepperd, of Warburg Securities, said Mr George was clearly stating that interest rates would not fall again before next month's Budget, and might also be hinting that the next move in rates would be up. 'But there is a get-out if the economy turns out weaker than expected,' he added.

Steve Barrow, currency analyst at Chemical Bank, said Mr George's speech 'did not seem an overt move to launch a serious defence of the pound'.

He said the Government would be aware that most attempts to talk up the currency did not work and it was probably also happy with a weak pound to boost recovery.

Mr George will succeed Robin Leigh-Pemberton as Governor of the Bank in July. His hawkish views on inflation are well known, and the speech's tone caused little surprise among City observers.

On Tuesday the Bank will publish its first quarterly report on the Government's anti-inflationary policy. The report will make no criticism of the cuts in interest rates from 10 to 6 per cent since Black Wednesday, but will suggest caution in the future.

January's inflation figures are published today amid City fears that the underlying measure - excluding mortgage interest payments - could break through the Chancellor's 4 per cent target ceiling. The headline rate is expected to drop to around 2.3 per cent.

With the prospect of unemployment topping 3 million looming over the Government next week, the Treasury yesterday took comfort from figures showing that manufacturing investment rose for the third successive quarter in the last three months of 1992.

Manufacturing investment rose 0.6 per cent between the third and fourth quarters after taking account of inflation, according to the Central Statistical Office. But fourth-quarter investment was 20 per cent down on its 1989 peak.

Commentary, page 23

(Photograph omitted)