The Bank of England is letting it be known that it is preparing to withdraw its demand for higher interest rates.
Analysts from leading players in the gilts market who met Bank officials on Tuesday afternoon formed the distinct impression that the Bank was looking for a way out of its increasingly isolated position on the need for higher rates.
"They were acknowledging that the last two weeks' batch of statistics, coming on top of earlier figures that had gone the Chancellor's way, simply made it inappropriate to raise rates whatever the inflation forecast projected," said one analyst who attended the meeting, which was chaired by John Townend.
One clue to the Bank's change of heart was that officials said that they hoped analysts had taken on board the fact that the August inflation report was much less hawkish on the inflationary threat than the May report.
They also made clear that the August report would itself have been adapted to take into account more recent figures indicating a weakening economy.
Another clear indication of a revision of thinking at the Bank was that on more than one occasion, officials used the word "recession".
Indeed they acknowledged that the manufacturing sector would be in recession were it not for the contribution of net trade.
Eddie George's difficulty in changing his line when he next meets Kenneth Clarke on 7 September is that the Bank's most recent forecast still shows underlying inflation - the annual change in the retail price index excluding mortgage interest payments - rising above the target level of 2.5 per cent in two years' time.
However, one way in which the Governor might remove himself from the hook on which he is impaled would be to stress the more favourable projection for the Bank's favoured measure of inflation. This additionally excludes the effect of changes in indirect taxes and conveniently is projected to peak somewhat lower than underlying inflation.
Kenneth Clarke may no longer have to face down Mr George on interest rates. But the latest figures on government borrowing under the Maastricht Treaty definitions underlined the problem he faces in preparing the November Budget.
These showed how far off the Government remains from meeting the conditions for participating in monetary union.
The Government ran a financial deficit of 6.1 per cent of GDP in the last fiscal year. The Maastricht Treaty sets the objective of 3 per cent or less as a condition for participating in monetary union.
In its summer economic forecast, the Treasury said that the financial deficit would fall to 2.75 per cent by 1996/7. However, very little progress has been made so far in reducing the budget deficit compared with last year and significant tax cuts will make it even more difficult for the Government to comply with the objective. The Treasury is keen for Britain to do this in order to improve our negotiating position on monetary union.
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