The very fact that the decision came as a shock shows the extent to which the new monetary arrangements set up in the past three years had developed a fledgling credibility. What they sought to address was the gaping hole in Britain's counter-inflationary defences left when sterling was torn in September 1992 from the anchor provided by the exchange rate mechanism. After a generation of post-war politicians who had played fast and loose with inflation to serve short-term electoral gains, something more than an avowal of faith on the part of the Treasury was called for. Declamatory rhetoric along the lines of Nigel Lawson's pronouncement in 1985 that inflation would be "the judge and jury" of economic policy had ceased to convince.
A package put together in time-honoured fashion on the hoof came up first with an inflation target and then with an enhanced role for the Bank of England in monitoring progress towards it through the quarterly Inflation Report. More important, the Bank's powers were then further extended, starting with the delegation of power to the Governor over the timing of implementation of interest rate changes and culminating with the decision a year ago to publish the minutes of the monthly meetings with the Chancellor six weeks afterwards. This was seen as a powerful weapon for the Governor against overtly political interference - if warnings turned out not to be heeded, the result could be a run on the pound.
There has already been a run of sorts on the pound, occasioned at least in part by a perception of the political weakness of the Government. The minutes of the meeting held on 8 March showed Eddie George already fretting about the fall in sterling since the rise in interest rates of 2 February. The trade-weighted index of sterling had fallen to 86, outside the trading range of 87-91 in which it had been for most of the previous two years. "The possibility could not be excluded that he might need to revert to the Chancellor if the situation were to deteriorate."
After yesterday's decision, sterling fell to a new all-time low during the day of 84.5, a fall of nearly 5 per cent since the meeting in February. The fall in the pound has meant that monetary policy, far from being tightened has, in effect, been loosened since then. Since March, not only has the pound dropped but the preliminary estimate of gross domestic product growth in the first quarter of 1995 proved unexpectedly strong.
Mr Clarke suggested yesterday that this might be revised downwards as a result of special factors like the National Lottery and mild weather. But if anything, it is likely to be revised upwards as official figures showing a stagnation of industrial production come into line with survey evidence such as the Confederation of British Industry Industrial Trends Survey, which show a buoyant manufacturing economy.
Meanwhile, inflation is rising and shows signs of being forced further up by the pound's decline. The retail price index rose in March at an annual rate of 3.5 per cent and underlying inflation, RPI-X, rose at 2.8 per cent, above the target range of 1 to 2.5 per cent by the end of the parliament. Furthermore there is clear evidence that the weakness of sterling is feeding through to prices.
There are good reasons to worry about the risk of hitting sectors already down for the count, like housing. There is also good reason to doubt whether low inflation is as vital to the performance of the economy as the Government maintains. And finally, there are very valid concerns that Mr George may be too zealous an anti-inflation hawk.
However, the case for a rise in interest rates rests less with the merits of low inflation per se and more with the clear dangers of repeating a boom-and-bust cycle. For the moment, wage inflation is quiescent, but if inflation breaks out of its current rate of 3.5 per cent, that could change, and we could see another wage-price spiral. That danger will become all the more pressing if sterling slides still further.
As a simulation conducted by the London Business School in a report published this week showed, delay in responding to a take-off in inflation means that the rise in interest rates has to be much larger, so risking plunging the economy into recession. As Eddie George himself put it in January, "a stitch in time saves nine".
Whatever the minutes of yesterday's meeting say when we see them next month, the damage has been done. The decision not to raise rates will be seen as a clear act of political interference to compensate for the Tories' disastrous performance in the local elections. Even if interest rates rise next month before publication, that will do little to mitigate the impression that when push comes to shove, the Chancellor is just like all his predecessors, willing to put short-term political advantage ahead of long-term economic gain.
Scholey's dangerous game
For reasons that appear to owe more to wishful thinking than anything else, it is generally believed in the stock market that Swiss Bank's offer for the investment banking side of SG Warburg will leave the rump, including the group's controlling stake in MAM, worth nearly £10 a share. All things are possible but it is hard to see why Swiss Bank should offer the premium on assets that would justify such a valuation. Ex-MAM, Warburg is at best breaking even. As key clients and personnel desert, the business becomes worth less by the day. As one seasoned City observer put it: "This is a bucket with a hole and the water is flowing out." The deal is almost done, but it seems unlikely to be worth the £750m the optimists hope for. Not unless an auction develops, anyway.
This is a dangerous game Sir David Scholey, the chairman, is playing on behalf of his shareholders. It may work but it is not a course he would recommend as a takeover strategist to his clients. If he doesn't pull this deal off, Warburg is finished and the share price will go through the floor. That is not a good negotiating position to be in. By opening talks with Swiss Bank Corporation, which as everybody knows would not have been Warburg's partner of choice in prouder days, Sir David could hardly have advertised more publicly the desperation of his position.
Swiss Bank wants Warburg's client base, its name and some of its people; but there is no point in pretending this is going to be anything but a rape. Not for Swiss Bank the gentle stand-offish relationship that characterised Deutche Bank's takeover of Morgan Grenfell; the plan is to imbue Warburg with Swiss Bank's own philosophy, culture, people and systems as swiftly as possible. It will also be paying as little as it can.