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TUC calls for interest rate hold – put the real economy first


Interest rates should be held at their current rate to help bring the pound down to a more competitive rate, a TUC report Monetary Policy in 2000 published today (Thursday)concludes.

The report, published as the Bank of England's Monetary Policy Committee is due to announce this month's decision, argues that the while the economy as a whole is doing well, manufacturing continues to struggle. At the very least, interest rates must be kept on hold in August and for the forseeable future. The Bank has undershot the inflation figure for the last twelve months, and may well continue to do so for the next. The Chancellor's remit clearly states that persistent undershooting of the target is just as serious as overshooting.

Monetary Policy in 2000 takes a wide ranging look at the central policy dilemma facing the Bank in achieving a competitive exchange rate without risking domestic economic stability. It shows that:

· the economy as a whole is doing well, with good rates of economic growth, falling unemployment and underlying price stability. But the strong pound and underlying structural weaknesses mean the manufacturing sector is struggling.

· between 1996 and 1999 output in manufacturing grew by only 2 per cent in real terms, the lowest in Europe. This compared with an average of 11 per cent across the Eurozone.

· while UK manufactured exports continue to struggle and the UK trade deficit on manufactures continues to rise, manufactured exports (priced in euros) increased by 21 per cent across the Eurozone in the year to Jan-March 2000, while the Eurozone trade surplus on manufactured goods rose 25 per cent (from 26 billion euros to 33 billion euros).

· in the year to May 2000 overall output growth has been flat while 95,000 employee jobs have been lost. Regional break-downs in the year to March 2000 show the biggest losses in Northern England, the Midlands and Scotland.

· manufacturing profitability has fallen to 7 per cent (net rate of return on capital) as margins on exports have been squeezed: however, overall profitability still remains above the historical average of the past 30 years.

The TUC estimates that a competitive level for the pound would be around 1.4 euros compared with the level today of 1.6 euros: narrowing the gap between UK rates and those in the Eurozone would help bring the pound down. In addition, the G7 central banks (the European Central Bank, US Fed, and the Banks of Japan, and England) should be ready to directly intervene in the financial markets to strengthen the euro against the pound;

a steady depreciation in the pound need not import inflation - there is plenty of spare capacity in manufacturing to increase exports, and competitive pressures mean firms can no longer easily pass on cost pressures from any increase in the cost of imports;

Brendan Barber TUC Deputy General Secretary said:

"Manufacturers trying hard to stay afloat will be keen for interest rates to stay the same for another month. Although in the long term rates must begin to fall again, a stretch of stability is the best bet for this struggling sector.

"That is why we are urging an active industrial policy with a strong regional dimension, backed by changes in corporate governance, partnership, and consultation rights for employees to shift the emphasis to long term investment rather than short term shareholder value."


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