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Tuesday, October 6, 1998 Published at 10:32 GMT 11:32 UK

Business: The Economy

Bank of England under pressure to cut rates

Eddie George is under pressure from business, unions and the City

The Governor of the Bank of England, Eddie George, is coming under mounting pressure to cut interest rates.

The Bank's monetary policy committee meets on Wednesday amid mayhem on international stock markets and mounting fears of a global economic meltdown.

The UK interest rate is now one of the highest among the leading industrial nations.

A cut from the current 7.5% level would be the first time rates have come down since June 1996 and industry, unions and the City have long been calling for one.

[ image: Gordon Brown has hinted that the time may now be right for a rate cut]
Gordon Brown has hinted that the time may now be right for a rate cut
The Chancellor, Gordon Brown, and other finance ministers from the G7 group of leading industrial nations have also indicated that rates should be cut to help ward off recession.

Slower growth in the UK service sector, a further wave of job losses and flagging confidence in the financial sector have strengthened those calls.

Speaking in Washington at the weekend Mr Brown said the risk of having a boom-and-bust economy was now falling.

He said: "We've got low inflation around the world and the Bank of England will make their decisions in the light of these facts."

Bank Governor Eddie George also raised hopes of an easing of monetary policy saying: "There is clearly serious weakness in some important parts of the world economy and the balance of risks has shifted."

But he stressed this was only one of several aspects the committee, which meets on Wednesday and Thursday, had to consider.

Meanwhile Spain's central bank cut its interest rate 0.5% to 3.75% on Tuesday.

However some analysts believe the UK central bank's decision will still be a close call.

David Kern, chief economist at NatWest, said: "It might just be that the MPC decides to show its independence and ignores the calls for a cut.

"The fall in global markets last week will definitely be noted and I would say there is a 60/40 chance of a cut. However, on UK data alone, it is still pretty close."

[ image: The Bank of England meets on Wednesday and Thursday]
The Bank of England meets on Wednesday and Thursday
Recent figures on British industrial output showed gross domestic product was stronger than expected, while domestic bank lending was also looking relatively healthy, he said.

A surprise upward revision to average earnings growth in Britain also caught the financial markets on the hop on Tuesday and cast fresh doubt on the likelihood of an interest rate cut.

Wage growth has long been a bugbear for the central bank - it thinks earnings rising faster than 4.5% a year are inconsistent with the government's 2.5% inflation target.

Jeremy Hawkins, economist at BankAmerica said: "This will not sit well with the BoE and must reduce the likelihood of a rate move on Thursday.

"At the very least, it will make it extremely hard to justify an ease of more than 25 basis points."

However most analysts are still betting that the Bank cuts its rate on Thursday as fears about the impact of a global recession outweigh domestic matters.

Lower interest rates are seen as a way of restoring confidence among consumers and investors, breathing life into economies.

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