City lambasts Chancellor

BY DIANE COYLE

Economics Correspondent

The surprise decision yesterday by Kenneth Clarke, the Chancellor, not to increase base rates from their current 6.75 per cent drew near-universal criticism from the financial markets. City analysts said that the failure to move had undermined the hard-earned credibility of monetary policy.

The pound's trade-weighted index reached a new low of 83.5 before recovering a fraction to end the day 1 per cent lower at 83.6. Traders warned that there was a danger of a further onslaught on the currency next week, including Monday, when the UK markets are closed.

In a rare display of unanimity, senior City economists condemned Mr Clarke's decision, which most believed had overruled the views of Eddie George, Governor of the Bank of England. Keith Skeoch, chief economist at James Capel, said: ''Mr Clarke is playing with fire. He set up the markets for a tightening of policy and didn't deliver. It is seen as politics interfering with the management of the economy."

Geoff Dicks, chief UK economist at NatWest Markets, said: "It was a high- risk decision. This is the first time the authorities have fallen behind what the markets thought was needed."

Bill Martin, UBS's chief economist, thought the failure to raise base rates marked a turning point in monetary policy. "We are in for gradual relaxation of the inflation goals," he said.

The Chancellor was on the defensive about yesterday's announcement, saying: "The idea that I take decisions with reference to the short-term political considerations of the day is wrong." He argued that there was no sign of undue demand pressure in the economy, adding that the peak in interest rates was nearer than it had been.

Mr Clarke said retail sales and the housing market were weak, while there was no evidence of a pick-up in earnings growth. The surge in commodity prices was levelling off. In addition, the Confederation of British Industry's latest monthly survey had shown a marked fall in manufacturers' expectations of price increases.

"We have an overall picture which shows that we are sustaining growth and have a healthy and balanced recovery," he said.

Mr Clarke and Mr George also had a preliminary estimate of retail price inflation in April - due to be published on Thursday - available at their meeting. It is expected to be better than the March figure of 2.8 per cent (excluding mortgage interest payments) as the effect of introducing VAT on domestic energy bills last April drops out of the 12-month comparison.

The Chancellor's other argument against raising interest rates again this month was that national output had not risen as much as the official gross domestic product figures suggested in the first quarter of this year. The official rise was 0.8 per cent, the same as the final quarter of 1994.

Mr Clarke called this a "very surprising" figure. He suggested that the National Lottery and mild weather explained its strength. "We will see later that the GDP figure will be revised," he said, suggesting that financial markets had over-reacted.

However, City economists dismissed this argument. Steven Bell, at Morgan Grenfell, said: "If there are definite distortions, they should have been explained by the statisticians when the figures were announced." Like many, he thought the preliminary estimate was more likely to be revised up.

Although the pace of recovery has slowed, most observers think there were strong arguments - on top of sterling's 5 per cent decline this year - for increasing base rates half- a-percentage point. The Treasury spelt out many of them in its monthly monetary report.

Apart from the rise in GDP, taking it to a level 3.9 per cent higher than a year earlier, underlying inflation rose between February and March.

Surveys suggest that growth in manufacturing is still strong, with capacity utilisation its highest since October 1988.

Mr Clarke insisted yesterday that he remained committed to the 1-4 per cent inflation target, and he was "conscious" of the ambition to get it in the bottom half of the target range by the end of this parliament.

He said: "There are no new inflation pressures to justify my raising interest rates in the light of policy measures already taken." Previous base rate rises and tax increases were still working through.

A majority in the financial markets believe the base rate rise has simply been postponed to the next meeting on 7 June.

The Chancellor could draw some shreds of comfort from the reaction of the gilts market, however. Although the decision hit long-term gilts, a strong rally in the US Treasuries market helped limit the damage. And short sterling futures, used to bet on interest rate moves, made strong gains. The market points to expectations of base rates at 7.32 per cent in September, down from an expected 7.6 per cent.

Gilts analysts said the market would be nervous until the publication of the Bank of England's Inflation Report on Thursday. If that showed the Bank to be more concerned about inflation, it would be "pretty grim" for gilts, according to Nigel Richardson, analyst at Yamaichi.

The FT-SE 100 index closed 12.6 points down at 3,261.7. Trading was edgy due to worries about the impact of the weak pound.

Outside the Square Mile, the absence of an interest rate rise was welcomed by industry and mortgage lenders.

Comment, page 17

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Recruitment Genius: Technical Report Writer

£25000 - £35000 per annum: Recruitment Genius: A Technical Report Writer is re...

MBDA UK Ltd: Indirect Procurement Category Manager

Competitive salary & benefits!: MBDA UK Ltd: MBDA UK LTD Indirect Procurement...

Recruitment Genius: Web Developer - PHP

£16500 - £16640 per annum: Recruitment Genius: This fast growing Finance compa...

Day In a Page

Greece elections: In times like these, the EU has far more dangerous adversaries than Syriza

Greece elections

In times like these, the EU has far more dangerous adversaries than Syriza, says Patrick Cockburn
Holocaust Memorial Day: Nazi victims remembered as spectre of prejudice reappears

Holocaust Memorial Day

Nazi victims remembered as spectre of prejudice reappears over Europe
Fortitude and the Arctic attraction: Our fascination with the last great wilderness

Magnetic north

The Arctic has always exerted a pull, from Greek myth to new thriller Fortitude. Gerard Gilbert considers what's behind our fascination with the last great wilderness
Homeless Veterans appeal: Homeless in Wales can find inspiration from Daniel’s story

Homeless Veterans appeal

Homeless in Wales can find inspiration from Daniel’s story
Front National family feud? Marine Le Pen and her relatives clash over French far-right party's response to Paris terror attacks

Front National family feud?

Marine Le Pen and her relatives clash over French far-right party's response to Paris terror attacks
Pot of gold: tasting the world’s most expensive tea

Pot of gold

Tasting the world’s most expensive tea
10 best wildlife-watching experiences: From hen harriers to porpoises

From hen harriers to porpoises: 10 best wildlife-watching experiences

While many of Britain's birds have flown south for the winter, it's still a great time to get outside for a spot of twitching
Nick Easter: 'I don’t want just to hold tackle bags, I want to be out there'

'I don’t want just to hold tackle bags, I want to be out there'

Nick Easter targeting World Cup place after England recall
DSK, Dodo the Pimp, and the Carlton Hotel

The inside track on France's trial of the year

Dominique Strauss-Kahn, Dodo the Pimp, and the Carlton Hotel:
As provocative now as they ever were

Sarah Kane season

Why her plays are as provocative now as when they were written
Murder of Japanese hostage has grim echoes of a killing in Iraq 11 years ago

Murder of Japanese hostage has grim echoes of another killing

Japanese mood was against what was seen as irresponsible trips to a vicious war zone
Syria crisis: Celebrities call on David Cameron to take more refugees as one young mother tells of torture by Assad regime

Celebrities call on David Cameron to take more Syrian refugees

One young mother tells of torture by Assad regime
The enemy within: People who hear voices in their heads are being encouraged to talk back – with promising results

The enemy within

People who hear voices in their heads are being encouraged to talk back
'In Auschwitz you got used to anything'

'In Auschwitz you got used to anything'

Survivors of the Nazi concentration camp remember its horror, 70 years on
Autumn/winter menswear 2015: The uniforms that make up modern life come to the fore

Autumn/winter menswear 2015

The uniforms that make up modern life come to the fore