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Tuesday, 7 November, 2000, 13:23 GMT
Bank chief warns against tax cuts
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Bank of England governor Sir Eddie George has warned that "over generous" tax cuts or a further spending splurge might mean that UK interest rates would have to rise.

Sir Eddie, referring to Wednesday's pre-Budget report, said: "I am surprised by the many billions of pounds that some commentators have suggested the chancellor could safely give away tomorrow".

It would be unrealistic to suppose that we can altogether exclude the need for further tightening at some point.

Sir Eddie George

He warned that the economy still needed to cool if it was to accommodate the increase in public spending announced by Gordon Brown in last summer's comprehensive spending review without stoking inflation.

However, this worry could be lessened by potential productivity increases resulting from globalisation and e-commerce.

He acknowledged that many exporters would like the Bank to signal that interest rates had peaked, to help reduce the value of the pound against the euro and so ease export difficulties.

But he said that even if the Bank were to indicate that it was not going to raise rates again, it would not necessarily have the hoped for effect of weakening sterling.

More hawkish

He said that the currency markets were not working that predictably, and added that it was unrealistic for the bank to "altogether exclude the need for further tightening at some point".

The Bank of England's Monetary Policy Committee meets this week to decide on interest rates, with most economists expecting them to be left unchanged at 6%.

The Bank's task is to keep the underlying rate of inflation in the UK close to 2.5%, with interest rates their sole weapon.

Although his tone was more hawkish than recent outings, Sir Eddie did add: "We don't rule out the possibility that the next move will be downwards either".

Asked about the weakness of the euro, Sir Eddie said the explanation was long term capital flows to the US, as the American economy's productivity growth acted as a magnet for global funds.

However he said he believed that the euro would reassert itself, probably within the next two years, as the attractions of US productivity growth were factored into the markets.

Sir Eddie also said that he did not expect the US election to have any influence on the dollar/euro exchange rate.

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