Interest Rates Stay on Hold despite Brown's Largesse ; NEWS ANALYSIS the City Is Divided over the Chancellor's Scope for Further Vote-Winning Budget Handouts before the Next General Election

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AS EXPERTS struggled to get their heads round the implications of Wednesday's pre- Budget report (PBR) for fiscal and monetary policy, the Bank of England delivered its own verdict yesterday by keeping interest rates on hold at 6 per cent.

The outcome had been forecast with complete unanimity within the City. But the decision avoided the embarrassment to the Government that a hike would have caused, coming just a day after it announced handouts of some pounds 4bn to pensioners, hauliers and car drivers.

Some economists have warned that the Chancellor's largesse - and any further handouts in the next Budget - could trigger further rate rises. But they said this would not come until after a likely election next summer.

In his PBR Gordon Brown, the Chancellor, unveiled extra spending measures and tax breaks that will cost the Treasury pounds 2.6bn in 2001/02 financial year and pounds 3.9bn in the following year.

He also announced consultation on a package of measures - mostly transport - that would add another pounds 1.75bn to the annual spending bill.

At the same time he raised the forecast for the surplus by pounds 4bn to pounds 10bn for this year and pounds 1bn to pounds 5bn in 2001/02 - thanks to higher tax receipts and an underspend by Government departments. He also squirreled away about pounds 1.6bn a year into a contingency reserve that could cover extra transport spending.

The Institute for Fiscal Studies, a leading economic think-tank, said Mr Brown had left himself no room to deliver a pre-election tax cut in next March's Budget. The IFS said Mr Brown could not use any more of the his forecast pounds 10bn public finance surplus without breaking one of his "golden rules".

Carl Emmerson, a senior economist at the IFS said: "He has given away as much as he could have afforded to do. There's no additional money in the Treasury forecasts for extra spending or tax cuts."

However, it added that the outlook could change if the Treasury's forecasts for the public finances for the rest of the year turned to be overly cautious. Mr Emmerson said the only way to justify further tax cuts would be to raise the estimate of the long-term trend rate of growth - something that was done in the late 1980s and which contributed to the recession of the early 1990s. He said that raising the rate from 2.25 to 2.5 per cent could justify a pounds 1.5bn give-away but warned the margin of error was too large.

The IFS declined to comment on the impact the PBR measures on interest rates, saying this was outside its remit. This baton was eagerly picked up by economists in the City. But there was a range of views yesterday.

They were divided into three camps: Those who believed rates hikes were now inevitable; those who believed a rate cut had now been ruled out and those still optimistic the next move in rates was down. …