Bank chief at odds with Brown's view

Mervyn King, governor of the Bank of England, yesterday challenged the rosy picture laid out by Gordon Brown in last week's Budget, warning that sterling's recent rise risked reinforcing imbalances in the economy.

The currency's 3% rise over the past month could hurt the manufacturing sector and delay the necessary slowdown in consumer spending, Mr King told backbench MPs on the Treasury select committee.

"The prospect of a more balanced expansion of demand will not have been helped by the 3% rise in sterling since the February inflation report," Mr King said, prompting a sell-off of sterling in the currency markets as dealers bet that a more expensive currency would delay the widely expected rise in interest rates.

Exporters interviewed by the Bank reported that the pound's rise since the start of the year was making life difficult for manufacturing. "We had gone into today's testimony concerned that the chances of a hike in April had risen to perhaps close to or above 50%," said Alan Castle, UK economist at Lehman Brothers.

"However, given that the testimony has played up the strength of sterling ... we are inclined to stick with our baseline call for a rate hike at the next meeting in May."

At one point, sterling was down 1% against the euro at 67.38p and 1.5 cents lower against the dollar at $1.7993.

On Wednesday Mr Brown told the committee that the upturn in the global economy would help boost British ex ports and.....continued below

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narrow the trade gap, currently running at record levels. Mr King said the Bank's central forecast was for growth of more than 3% this year, in line with the Treasury's Budget assessment. "I do see a chance, a good chance of a rebalancing in the economy but one can never be sure of the timing of it," he said.

Order books are at their healthiest for three years, despite the strong pound, according to the Confederation of British Industry. Export orders put in their best showing since November 1996, the CBI's latest survey showed.

"The value of sterling is yet to have an impact on export orders, though manufacturers will be concerned if the pound strengthens further," said Ian McCafferty, CBI chief economic adviser. "The manufacturing recovery is gaining strength, with demand improving domestically and globally."

City analysts warned however that business surveys had overestimated the strength of the recovery in industry. "Historically, this survey has not had a good relationship with the official manufacturing data," said Mr Castle.

While the Bank was clearly sensitive to the impact of a higher currency on the export sector, analysts said a rate rise by the summer was still on the cards because of the strength of household borrowing.

Lending figures published yesterday by the British Bankers' Association showed a post new-year surge in mortgage approvals, which promises to boost household borrowing next month. Approvals totalled 216,400 loans last month, well up on January's 176,200, the BBA said.

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