Britain is enjoying the best inflation performance for a generation mainly because inflation is low everywhere else too. While government borrowing has risen in both France and Germany, this is largely because of economic slowdown. In the UK it remains high despite five years of growth. The financial markets have delivered their verdict. Only Italian and Spanish government bonds have higher yields than gilts.
Markets are not going to accept Ken Clarke's assertion that he is a prudent chancellor until there is decisive evidence that he is prepared to do something unpopular, like raising interest rates in the months before a general election. For, so far, the economy is displaying the classic pre-election pattern. Growth is accelerating and many indicators are returning to levels last seen in the late 1980s. Government policy is also in its election campaign phase. Government spending is running ahead of plans. Mr Clarke has cut income tax and interest rates. He has disagreed with the advice of the Governor of the Bank of England five times in little over a year. Every time he has erred on the side of faster growth rather than lower inflation.
Views about the timing and direction of the next move in rates vary widely. Some think base rates will rise before the likely election date in May because evidence of a boom will force the Governor of the Bank of England to push much harder for a precautionary increase. Others think Mr Clarke will manage to hold off an interest rate rise with a cautious Budget, leaving the next government to put both fiscal and monetary policy back in order. A few still think he will brazen out a further reduction in rates using the expected decline in headline inflation during the next few months as an excuse.
The Chancellor will improve his credibility if he resists the temptations of extra tax and base rate cuts. It is clear the economy does not need them. Enough has been done to create a benign economic backdrop for the Conservatives in time for a spring poll. Mr Clarke's most important task is to do what's best for Britain, and get his Government's policies out of the Italian league.Reuse content