Clarke rate hint confuses City

Kenneth Clarke caused confusion in the financial markets after his monthly meeting with Eddie George, Governor of the Bank of England, yesterday.

By appearing to give a hint that he had decided to raise interest rates, the Chancellor sent the pound soaring. But by the end of the day it looked almost certain that base rates would not be changed and investors pushed the FTSE 100 index up 20 points to a record 4,281.

The Treasury insisted that nothing could be read into the Chancellor's remarks yesterday. In a lunchtime television interview, Mr Clarke said: "Eddie will announce the decision in due course."

He continued: "Wait to see the minutes and then you'll see the sensible discussion which Eddie George and myself have had."

According to the Treasury, the Chancellor was merely referring to the fact that although he takes the interest rate decisions, the Bank decides when and how to implement them. But the City was confused.

"By and large the Bank does not say anything unless something is going to happen," said David Mackie, UK economist at JP Morgan. However, the Bank did not signal a change in rates yesterday afternoon.

"This is a strong, but not conclusive, hint that nothing has happened," said Mr Mackie, though confirmation must wait for the Bank's money market operations this morning.

Even so, the pound held on to its earlier gains. It climbed by just over 2 pfennigs to reach DM 2.6905, and by more than a cent to $1.6322, yesterday. Thanks to the weakness of the yen, sterling also broke through the psychologically important 200 level, its highest for four years.

Most analysts would be amazed if Mr Clarke does turn out to have given the go-ahead for an interest rate increase. Rates have risen on only two occasions during the six months before a general election - in 1955 and 1979.

Across the Atlantic, as most analysts had expected, the Federal Reserve left US interest rates unchanged after its two-day policy meeting. But Michel Camdessus, managing director of the International Monetary Fund, warned the Fed needed to be vigilant against inflation.