6% loan rate surprise from Clarke

Kenneth Clarke sprang a surprise yesterday with a pre- Budget increase in interest rates. In a move unprecedented in the run up to a general election, the Chancellor of the Exchequer raised base rates by a quarter-point to 6 per cent.

The decision followed months of pressure from Eddie George, the Governor of the Bank of England, as the danger that the economy was overheating grew clearer. If Mr Clarke had turned down the Bank's advice again yesterday he would have risked an embarrassing escalation of his disagreement with the Governor.

Mr Clarke defended the increase, telling the Commons that he was setting policy for 18 months or two years' time.

He denied that signs of renewed inflation had forced his hand, saying: "I wanted to look ahead and stay ahead of the game. If I waited for the economy to show inflationary pressures it would be too late."

The Bank warmly welcomed the Chancellor's prudence. Mr George said: "Moving now . . . is likely to mean that we will need to tighten policy by less than we would otherwise."

Some analysts nevertheless warned that the economy's robust growth meant interest rates would have to rise again before long.

Although most praised Mr Clarke's boldness, they predicted that the base rate rise pointed to higher than expected tax cuts in the Budget on 26 November.

Britain's biggest lenders said they had no plans to increase mortgage rates immediately, although it depended on what the Budget held. Stiff competition in the mortgage market will make lenders unwilling to raise borrowing costs until they have to, so most experts predicted yesterday's move would not dent the housing market recovery.

However, the business reaction to the Chancellor's move was less than enthusiastic. The Confederation of British Industry said that it was a surprising decision given that inflationary pressures were subdued.

Mr Clarke also caught the City on the hop. The pound soared to its highest level for more than two years, but share prices and gilts fell.

Gordon Brown, the shadow Chancellor, described the decision as "the inevitable result of a policy of a government that has failed to tackle the fundamental weaknesses of the economy and as a result left inflationary pressures ready to undermine it".

Pound soars, page 20