The Bank of England, Britain's central bank, yesterday said it was ready to cut interest rates if the international economic situation worsened.

After voting to keep official interest rates unchanged at 7.5 per cent, the Bank's monetary policy committee (MPC) took the unprecedented step of stating that it had discussed "the potential impact of recent international and domestic economic developments" on Britain. "Although the committee judges that the current level of interest rates is necessary to meet the inflation target, it recognises that deterioration in the international economy could increase the risks of inflation falling below the target. The committee will continue to monitor these risks," the Bank said.

The statement was the first time the committee had commented following a "no change" decision in its 16-month history. The committee is mandated by the British government to aim to keep underlying inflation at an annual rate of 2.5 per cent.

Mr Michael Saunders, UK economist at Salomon Smith Barney investment bank in London, cautioned against exaggerating the committee's eagerness to cut rates.

But the financial markets seized on the hint that rates could be lowered soon.

Interest rate future contracts sold in London now anticipate that rates will be cut to 7 per cent by the end of this year.

Sterling sank by two pfennigs against the deutschmark during the day to DM2.845, the pound's weakest level against the German currency since last October.

The Confederation of British Industry, the employers' group, said the depressed outlook for the British economy meant a cut was urgently needed.

The CBI's distributive trades survey for August found that 34 per cent of retailers reported a fall in annual sales growth, while only 32 per cent said sales had increased.

"The latest evidence on inflation has generally supported the view that the upward risk to the inflation target is subsiding, whereas the downward risk to growth is becoming more serious," said Ms Kate Barker, the CBI's chief economist.

"Our concern is that business will have to continue to endure the slow torture caused by the combination of high interest rates, a strong pound and economic turmoil abroad," said Mr Ian Peters, deputy director of the British Chambers of Commerce.

The Bank of England's statement followed an unusually candid remark by Mr Tony Blair, the British Prime Minister.

He said in a television interview on Wednesday night: "If we get over this interest rate peak - as I hope we may - and the pound is already coming down gently in the way it should . . . then we have the best chance of long-term stability for the future."