Clarke ready to raise rates but sees no need

Kenneth Clarke said for the second month running that he was prepared to raise interest rates if the economy started to expand too fast. However, minutes of his April meeting with Eddie George, Governor of the Bank of England, showed that the Chancellor thought there was no danger of having to do so soon.

The minutes reported the Chancellor saying: "He would be prepared to raise interest rates if the economy did begin to grow unsustainably fast but noted that there were presently no signs of this."

Growth was below trend and inflationary pressures remained very subdued, he added. However, the Chancellor insisted that growth could reach 3 per cent this year.

Geoff Dicks, an economist at NatWest Markets, said: "So long as the Chancellor continues to hold that view his scope for any rate cuts is curtailed, if not completely eliminated."

Mr Clarke's optimism flies in the face of a cut in the internal Treasury growth forecast below 3 per cent, reported in the Independent recently.

The Bank of England has subsequently warned that interest rates might need to rise if the Government wants to hit its inflation target in 1998.

In its Inflation Report earlier this month it predicted inflation was "marginally" more likely than not to be above 2.5 per cent by then.

Mr George and Mr Clarke agreed to leave rates unchanged in April, the month after a third cut in the cost of borrowing. Mr George said the pause in manufacturing could last some time but growth would probably be stronger later in the year.

The Governor yesterday acclaimed the success of the framework for setting monetary policy. In a foreword to the Bank's annual report he said the delayed publication of monthly meetings with the Chancellor of the Exchequer had made the debate more open.

Too much attention had been paid to his "technical" disagreements with the Chancellor, he wrote.

Mr George's own pounds 3,008 pay rise to pounds 232,423 in the year to February represented a modest 1.3 per cent, well within the 2.4 per cent inflation rate.

The economy was on course to meet the inflation target and the reductions in interest rates in recent months had been fully justified

Kenneth Clarke

The downside risk had not yet materialised and the probability of stronger growth later in the year and into next was quite high

Eddie George