"I do not set interest rates to achieve a level for sterling," he said. "We have no alternative but to see where the markets will take us."
The Chancellor insisted that he was as determined as the Governor of the Bank of England to achieve the Government's 2.5 per cent inflation target. The exchange rate was only one of a range of factors he looked at, he told the Treasury select committee, although agreeing that the surge in the pound had tightened monetary conditions.
However, Mr Clarke refused to accept that he was out on a limb in not increasing interest rates when a majority of economists said they would have to rise. "I don't just go out and count heads amongst financial advisers," he said.
Much of the grilling MPs gave him yesterday focused on European monetary union. Mr Clarke insisted that a single currency would not be acceptable if the figures were fudged.
"It is perfectly possible that I would be one of the most vehement opponents of the UK joining," he said. "What matters is whether the countries going into Emu are going to stay convergent and are genuinely compatible with each other."
He said he was still doubtful about the 1 January 1999 deadline for the start of the single currency. However, the time for making a judgement would be in early 1998.
The Chancellor told the MPs that he thought the argument was going in favour of a pragmatic and flexible "stability pact", the agreement for policing member countries' budget deficits after the start of the single currency.
The Germans have been arguing for a rigid system of fines on excess deficits, but Mr Clarke said there was not much distance between his view and that of Theo Waigel, Germany's finance minister. "The best penalties are never imposed," he said.
The UK's budget position was at least as satisfactory as that of other EU countries, he said, although the overriding aim was to achieve budget balance in the medium term rather than simply meet the Maastricht requirements.
Mr Clarke refused to confirm, despite persistent questioning from Liberal Democrat Malcolm Bruce, that the tax burden would rise by more than pounds 1bn next year.Reuse content