Bank ready to fight Clarke on rate cut

Building recovery: Eddie George tells Treasury Committee that caution may benefit economy more in long-term

PAUL WALLACE

and COLIN BROWN

Eddie George, Governor of the Bank of England, has hinted that he will oppose a cut in interest rates when he meets Kenneth Clarke next Wednesday.

Tory MPs anxiously hoping for a rate cut to fuel the "feel-good factor" after a lacklustre Budget were infuriated by his remarks.

The vice-chairman of the Conservative backbench finance committee of MPs, David Shaw, last night said his committee backed the Chancellor against Mr George's judgement. "The officers of the finance committee are absolutely united in backing the Chancellor's stance on interest rates. All of us believe that by Easter there will be at least one or two small interest rate cuts of one-quarter per cent each."

In evidence to the Treasury Select Committee, Mr George said the Bank was "very conscious of the idea that January is a key month for wage settlements". If the Ford pay offer of 9.5 per cent over two years were to become a benchmark for settlements, it would be "a very serious situation", and this would not become clear until well into January.

Another risk to the inflationary outlook could come from the renewed weakness of the pound, leading to a rise in import prices. Mr George reminded the committee that "the central best guess" of the Bank's Inflation Report in November was that inflation was still not on track to meet the Government's target of 2.5 per cent or less in two years' time. Since that report, the pound has fallen by a further 2 per cent against a basket of currencies.

A further concern would be if the recent rapid growth in the amount of money in the economy were to persist. Mr George told the committee: "We will err consistently on the side of not taking risks with inflation."

The chairman of the Conservative Party, Brian Mawhinney, gave the clearest hint after the Budget that interest rates would fall, to help fulfil the Government's hopes that the cautious Budget would pave the way for a general election victory. Cuts in interest rates are vital to the overall strategy for reducing the cost of home loans, putting more money in people's pockets, boosting the housing market, and lifting Tory Party morale.

Senior Tory MPs said the economic fundamentals were sufficiently sound to justify an interest rate cut as early as next Wednesday. But they believe the clash with Mr George is not sufficiently serious to force the Governor into resignation.

Eddie George conceded for the first time that if interest rates had been raised as he requested in May, the economy would have lost even more momentum this year. He said Mr Clarke had been lucky to get away with his decision. "I think it turned out very fortunately for him." Referring to the subsequent rally in the value of the pound, he said: "We were bailed out of that frankly by a change of sentiment to the dollar."

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