Balls adds pressure on Bank to reduce rates

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As Chancellor Alistair Darling briefed the Cabinet on the stock market turmoil and Northern Rock, Downing Street insisted the UK was "well-placed" to withstand the shocks of the last 24 hours.

But Mr Balls, a former economic adviser to the Prime Minister, appeared to go much further by raising the issue of the need to slash rates to protect the economy.

Normally Cabinet ministers steer clear of discussing interest rates to protect the independence of the Bank of England, but the Children, Schools and Families Secretary told the BBC the Bank had the power to order cuts. "The good news from Britain's point of view is that inflation is low, our interest rates are low - and are coming down," he told BBC1's Breakfast.

"The countries that are getting into difficulties when you have these kind of global problems... are those where inflation is up, they can't cut interest rates. Those days are behind us in Britain. The Bank of England has got flexibility, inflationis low and we will see what happens in the next few months."

The City was disappointed when the Bank failed to cut rates this month, but political and business pressure is now huge and the Monetary Policy Committee will have difficulty avoiding a reduction next month.

Mr Balls underlined the message when he told Radio 4's Today programme-"With inflation low, with the Bank of England able to cut interest rates, as we saw just a couple of months ago, I think we are in a strong position.

"But that doesn't mean we aren't going to be affected. Of course we are. It is a global economy and our companies and many of our jobs these days are affected by events around the world." By contrast, Mr Brown's spokesman said: "He thinks these are matters for the Bank of England."

He made clear the Prime Minister regards the instability as principally an American problem, rather than a reflection of fundamental difficulties in the UK.

"The fundamentals of the British economy have remained sound," he said.