It's not a shock to us that people in the US are going to be paid more. Jonathan will be paid the rate for the job," said Sir Roger Hurn, the ongoing chairman. The company's remuneration committee has yet to make any decisions on salary. Mr Bloomer received a basic salary of £660,000 last year, while Mr Devlin's basic salary was $1m (£667,000).The deal is expected to generate $130m (£87m) of annual savings by 2002, at a cost of "less than one year's savings", the companies said.. It looks increasingly likely that Sir Edward George, the Governor of the Bank of England, will soon have to write an open letter to the Chancellor of the Exchequer explaining why inflation has fallen below 1.5 per cent. Today, inflation at 1.8 per cent is already far below the 2.5 per cent target and seems about to fall further, thanks to Mr Brown's disinflationary Budget. It looks increasingly likely that Sir Edward George, the Governor of the Bank of England, will soon have to write an open letter to the Chancellor of the Exchequer explaining why inflation has fallen below 1.5 per cent.

Today, inflation at 1.8 per cent is already far below the 2.5 per cent target and seems about to fall further, thanks to Mr Brown's disinflationary Budget.

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If inflation falls more than 1 percentage point below the target, Sir Edward must, by law, explain why in an open letter. One economist said: "If you had said in the 1970s that this would happen, people would assume you had taken leave of your senses."Against this background, figures yesterday showing falling inflation on the factory floor fuelled calls for swift action by the Monetary Policy Committee to cut rates from 5.75 per cent. But there remains a deep divergence among economists in the City, not only about the path for rates but over the way in which the UK economy should be viewed.The latest survey of independent economists shows at one extreme the ITEM Club model run by accountants Ernst & Young saying rates will fall to 5 per cent, and at the other Charterhouse Securities forecasting 7.15 per cent by the end of the year.Yesterday's data certainly offered ammunition for those calling for rate cuts. Prices charged by manufacturers fell 0.1 per cent to leave annual inflation at 1.6 per cent, the lowest for 18 months.

But input prices rose by 1.8 per cent in the month of February alone.Adam Law, UK economist at Barclays Capital, said: "Competitive pressures are still limiting manufacturers' scope for raising prices. This is clearly good news for interest rates."Manufacturers have good reasons to press for cuts. Data on Friday showed their output fell in February at the fastest rate for four years, as the strength of the pound continues to depress export prices.Manufacturing counts for only a fifth of the economy but there are signs the malaise extends into other sectors. Profit warnings are rising, and corporate profitability is running at a two-year low.John Butler, UK economist at HSBC - which expects rates to fall to 5.25 per cent by the end of this year - said inflation looked "pretty good", adding: "We will get better news going forward and the question is whether it can stay above the 1.5 per cent mark."The MPC must be the only people who are thankful for foot-and-mouth disease [yesterday's figures showed a 1 per cent rise in the price of animals for slaughter, due in part to the shortage of marketable animals]."But Richard Jeffrey at Charterhouse said the manufacturing story was old news. "It is fair to say, with oversupply in most manufactured goods, we are unlikely to see significant price inflation in the foreseeable future." He was more concerned by signs that excessive demand had been allowed to build in the domestic economy.Away from the manufacturing industry, most measures of the services sector are showing strong growth, and consumer spending was still very robust.

Mr Jeffrey said other measures of inflation showed mounting pressures. The labour market was still tight, with unemployment falling, vacancies at a record high and wage inflation creeping up. House price inflation until recently had also been a worry.He said that unless the US downturn put the brakes on UK domestic growth the MPC would have to raise rates, even if inflation fell below 1.5 per cent in the short term.But there is growing band of economists in the City who believe the economy can sustain its current above-trend rates of growth and keep inflation on target. David Walton at Goldman Sachs, which forecasts rates falling to 5.25 per cent, said: "In our forecasts, stronger productivity growth takes over from falling unemployment as the main factor keeping GDP growth slightly faster than its historic trend." Goldman believes that if the US stagnates this year, UK interest rates will fall as low as 4.25 per cent.HSBC's John Butler believes the MPC does have room for manoeuvre because they expect the US economy to suffer a prolonged recession through the rest of this year and into 2002.

"The MPC can cut rates as insurance - and it's costless insurance because if inflation rises it will only bring it back to target," he said.He said the US would dominate the global outlook, overshadowing valid concerns about the strength of the UK's domestic economy. "But this does mean that the MPC won't have the scope to cut rates as sharply as in the US because there will be concerns over the domestic picture," he said.At the centre of this concern is the long-term impact of last week's Budget. Although the immediate impact will be lower inflation, thanks to cuts in vehicle taxes, economists are worried about the extra spending package.Michael Saunders, at Salomon Smith Barney, said he believed this fiscal loosening had put paid to more rate cuts. "The fiscal boost creates significant upside risks toUK growth that, at the least, will help offset external risks," he said.Charterhouse's Mr Jeffrey said he was worried the fixation with the inflation target was preventing discussion about wider trends in the economy."Inflation is only one possible symptom of the underlying problem - excess demand," he said. He urged the Treasury to rewrite the target, giving powers to the MPC to take account of any imbalance between growth in demand and growth in supply. "Those who framed the inflation target never contemplated the situation that has prevailed over the last four years with falling inflation despite above-trend growth," he said "But they can hardly be blamed.". Plunging confidence on Wall Street sent shares into a nosedive yesterday with all three major indices registering sharp losses and the broadest market index, Standard & Poor's, showing the US in a bear market for the first time in 13 years.