Mr Clarke said: ''Setting interest rates consistently at the level judged necessary to achieve the inflation target of 2.5 per cent or less should ensure that inflation will remain in the range 1-4 per cent.'' The measure would remain the RPI excluding mortgage interest payments. He said that random events such as last year's sharp rise in commodity prices could temporarily take inflation above the desired 2.5 per cent. It was not possible to hit a specific inflation number at all times.
Financial markets had expected this modest easing, thanks to the Chancellor's recent statements that inflation as low as 3 per cent would be a triumph. In his speech he pointed out that even Germany has only seen prices rise by less than 2.5 per cent a year five times in the past quarter-century. Many analysts will see the admission that a range of 1-2.5 per cent is too narrow to be achieved all the time as simply realistic.
In the light of Mr Clarke's statement, base rates look unlikely to rise until later in the year, when the effect of sterling's weakness will begin to feed through to domestic prices. The Chancellor said the interest rate decision had been finely balanced in the last couple of months, with mixed evidence making the decision difficult.
Mr Clarke alluded to the widespread speculation that he and the Governor of the Bank of England, Eddie George, had disagreed about the decision at their meeting on 5 May, the day after the local elections. Minutes of this meeting will be published next Wednesday.
The Chancellor said he and Mr George have "friendly, constructive, occasionally combative discussions about how best to achieve the inflation target to which we are both passionately and equally committed".
In his speech at the Mansion House last night Mr George agreed that monetary policy was a question of balancing risks. ''It is hardly surprising, given the uncertainties, that reasonable people may differ from time to time in the judgements they make as to precisely what course to steer.''
He welcomed Mr Clarke's ''unambiguous'' restatement of the aim of permanently low inflation. The Bank would continue to advise the Chancellor on how to achieve a target of inflation at 2.5 per cent or less.
On the question of fiscal policy, Mr Clarke insisted that there would be no dash for growth before the election. In an echo of Margaret Thatcher, he said he was not for turning: ''The British people do not want to see another boom that goes bust.'' The Chancellor repeated the aim of achieving a balanced budget over the medium term. Tax cuts would require spending cuts. He challenged the Labour Party to state what its borrowing and inflation targets would be. ''The broad principles of policy are meaningless without the numbers - as useless as a body without a bone structure,'' Mr Clarke said.