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Comment: MPC strategy may be too clever by half

At first glance the Bank of England's decision to lift interest rates by a quarter point but simultaneously suggest that there are no more increases in the pipeline looks a smart move. The pound duly fell by four pfennings, short sterling pointed to rates peaking at 7.25 per cent and, for once, the relentless charge in the FTSE 100 was led, not by the financials, but exporters, oil stocks and engineers.

At second glance the Monetary Policy Committee's strategy still looks pretty shrewd but there are also some potential pitfalls ahead. By implying that the latest rise takes rates to a level consistent with the inflation target, the MPC has for now taken the wind out of sterling's sales, providing some respite to the battered export sector of the economy

But what is sauce for the manufacturing goose is also sauce for the consumer gander. The currency markets are no longer factoring in a succession of rate rises but nor is anyone else, which will lessen the dampening effect of yesterday's increase on consumer spending. True it will make credit card borrowing more expensive and push up some mortgages but if the previous three quarter point increases failed to do the trick, why should a fourth one?

Moreover, as the MPC. itself concedes, the present strength of sterling largely reflects factor's outside of its control, mainly the prospects for the German mark inside a single currency. There can be no guarantee that yesterday's drop in sterling will not be followed by a similarly sharp bounce.

Still, industry can console itself with the knowledge that things could have been worse. The MPC did not listen to the argument that one big rate rise was necessary to penetrate the psychology of the consumer and kill incipient inflation once and for all.

The balance of probability remains that the MPC's policy will deliver lower interest rates at the peak than otherwise might be needed and a softer landing in 1998 or 1999. But it remains a very fine judgment.