City expects rate rise after the election

The Chancellor of the Exchequer will resist raising interest rates ahead of the general election, forcing a sharp post-election rate increase, the City has concluded, writes Diane Coyle.

Kenneth Clarke is not expected to take the advice of Eddie George, Governor of the Bank of England, to raise rates at their regular monthly meeting on Wednesday. This is despite the fact that the pound's exchange rate, the Chancellor's main rationale for ignoring Mr George last month, has fallen significantly during the past week as the markets have realised that interest rate policy is on hold until after the election.

Two reports published today predict sharper base rate rises later as a result of Mr Clarke's likely inaction. David Kern, chief economist at NatWest Bank, says: "The growing likelihood that underlying inflation will remain above the 2.5 per cent target indicates that pronounced post- election base rate rises will be required."

Michael Dicks, UK economist at Lehman Brothers, reckons people will give the Chancellor the benefit of the doubt. But he too predicts that sterling will weaken and that market sentiment will turn sharply after the election.