Clarke and George at odds over last base cut

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The Independent Online
Kenneth Clarke, Chancellor of the Exchequer, and Eddie George, Governor of the Bank of England, clashed over the reduction in the cost of borrowing earlier this month in their biggest disagreement about policy since last spring, City analysts concluded yesterday.

Minutes of their previous meeting revealed that the Chancellor almost certainly rejected the Governor's advice when he cut interest rates for the second time in five weeks. The Bank of England's silence about the move had already aroused suspicions of a clash.

Mr George agreed to a quarter-point interest rate reduction in December but warned against a bigger cut. ''It would look as if the top priority were no longer the attainment of the inflation target,'' he said.

If minutes of January's meeting - due out on 21 February - confirm that Mr Clarke and Mr George were split over last month's move, the Chancellor will be under strong pressure from the financial markets not to cut rates again unless there is new evidence of weaker growth. Mr Clarke himself has predicted that the pace of growth will pick up during the course of this year.

City economists said Mr George was very unlikely to have changed his mind in the weeks before the Chancellor announced the second quarter-point fall in base rates to 6.25 per cent. ''These minutes confirm the suspicion that the January meeting did not go smoothly,'' said Robert Barrie, UK economist at BZW.

Marian Bell at Royal Bank of Scotland said: ''This demonstrates that monetary policy is a completely political process because the Chancellor decides when to change interest rates.''

In December, Mr George said cost and price pressures had eased considerably, and it was now ''more likely than not'' that inflation would be under the 2.5 per cent target in 1997. A case could be made for a cut in base rates.

However, the Governor argued that it ought to be a quarter-point reduction. Rapid growth of money and credit and the fact that January is a key month for pay settlements meant he would not advise a bigger cut.

The Chancellor replied that the question in his mind was not whether rates should fall but by how much - and he was sympathetic to the view that it should be half a point.

Mr Clarke opted to accept the Governor's advice last month. But he went on to trim another quarter point from the level of base rates on 17 January despite worse monetary figures. ''The gap between the two men will have increased in the meantime,'' said Don Smith, an economist at HSBC Markets.

Their disagreement in January was the third under the present monetary arrangements. The Chancellor rejected the Governor's advice against reducing base rates in February 1994 and in favour of increasing them in May last year.

David Mackie, UK economist at JP Morgan, said: ''It is not surprising that they sometimes disagree. What matters is whether they quickly come back into line.''

Financial markets would be alarmed if the Chancellor cut the cost of borrowing again in the face of Bank of England advice, he said.

Recent figures show that growth in the broad money measure has climbed into double figures for the first time in five years, and retail spending has picked up.

Mr Clarke and Mr George are next due to meet on 7 February, a week before the Bank of England publishes its quarterly Inflation Report.