Clarke firm on rates policy

Exchange rates in turmoil: Diane Coyle reports from the G7 and IMF meetings in Washington
Britain will not raise base rates for the sake of sterling, the Chancellor, Kenneth Clarke, said after the G7 and IMF meetings in Washington.

"I have no intention of altering interest rates just to produce an exchange- rate result," Mr Clarke said, adding that sterling was just one of a range of relevant indicators.

The Chancellor also said that tax cuts in Britain would have to be matched by reductions in government spending. "Tax cuts have to be earned by the delivery of spending control." He pointed out that this year's spending round was not yet under way.

Mr Clarke said policy in Britain, as in the US, was aimed at delivering a "soft landing". He said: "The British economy is on course for a sustained recovery with low inflation." The Government was committed to keeping fiscal policy under control, however.

Finance ministers of the Group of Seven main industrial countries concluded on Tuesday that reducing big deficits, or surpluses, was the only measure that would help to reverse recent currency swings. Fiscal consolidation - IMF-speak for cutting government budget deficits - has emerged as the big theme of this week's meetings.

Yesterday's meeting of the IMF's policy-making Interim Committee concluded that the same principles of fiscal rectitude applied to industrial and developing countries alike.

Finance ministers and the IMF agreed to create a better early-warning system to help to prevent new, Mexican-style financial crises. The IMF will be responsible for new surveillance procedures, looking more frequently at economic indicators ranging from budget deficits and the build-up of foreign debt to the rate of export growth and inflation-adjusted exchange- rate movements. Countries will have to deliver better and more timely economic statistics.

The IMF's efforts will probably be concentrated on the 30 or 40 biggest countries, where a crisis would spill over and affect world markets. There is also agreement that the IMF should be franker in giving governments its assessment of their policies. Mr Clarke said the IMF now recognised it should not "pull its punches".

Improved surveillance procedures could be put into operation very soon. However, discussions about whether the IMF needs additional resources for future financial rescues will take some time. Britain, along with most other industrial countries, opposes the creation of a special new fund.

A more likely outcome is the expansion of the General Arrangements to Borrow, a scheme whereby 11 industrial countries lend the IMF money if it needs it to support one of their number. Britain drew on the GAB in 1977.

The world's poorest countries were given some prospect yesterday of extra debt relief. It is now more likely that the IMF will sell a small proportion of its $40bn gold reserves to finance new concessional loans for such countries, reducing their interest payments on foreign debt.