Bullish Major gives rates warning

THE PRIME MINISTER said yesterday that Britain was poised on the threshold of an economic recovery unseen since the Second World War. But he gave a clear warning that interest rates could be raised again to protect it.

John Major's speech last night to businessmen in Saudi Arabia, before flying to Abu Dhabi and South Africa, was the most bullish assessment of the economy since the election. But his first remarks since the 1/2 per cent increase in interest rates were coupled with a signal that he was prepared to raise interest rates again to avoid a return to 'boom and bust'.

In a clear warning that the forthcoming Budget will be tough, he emphasised that low inflation and a squeeze on public finances were priorities. 'Almost every previous economic recovery we have seen has been wrecked by overheating. Time and again, frustratingly, when things seem to go right, they suddenly go too right too quickly and we have headed off into difficulties yet again. I am determined not to allow this recovery to be endangered in this way. We are going to take no risks whatever with inflation.'

The British public and businesses require stability in household budgets, mortgage repayments, investment decisions and export pricing. While his forecast of a golden age for economic recovery will be regarded with scepticism at home, ministerial sources said his choice of a foreign audience was partly designed to have greater impact in Britain. It was also intended to reassure the Saudis, large-scale investors in gilts, of British economic and currency stability.

The sources said that Mr Major was optimistic about the political pay-off for the Tories from sustained economic recovery over the next two years. 'The scale of the opportunities that lie ahead of us are not wholly appreciated,' he said. 'Britain is at an historic turning point. We are determined this is going to be a recovery without inflation, a recovery that will last, a recovery for the long term, that will act as a spur for exports.'

He added that not every statistic on all occasions would be good. 'This is a broadly based recovery set to last. The overall direction is clear . . . Britain is on course for long-term economic recovery.'

Howard Davies, director general of the CBI, who is travelling with Mr Major, said that CBI surveys showed confidence higher than at any time since 1988, not 1945, but it shared Mr Major's optimism about low inflation and steady recovery.

In talks with King Fahd of Saudi Arabia, Mr Major discussed further arms sales. The Saudis confirmed the comprehensive multi-million pound arms deal signed under Baroness Thatcher would not be renegotiated but they are seeking credit deals for future arms sales.

Mr Major coupled his remarks with an upbeat assessment of the chances for lasting peace in Northern Ireland and hinted Britain may be ready to acknowledge the IRA ceasefire is permanent. The IRA was 'very close' to providing the Government with the assurances it needed, he said.