Commentary: Lower rates justified

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The markets would no doubt echo the CBI's call yesterday for a 'clear and coherent' explanation of government economic strategy in tomorrow's Mansion House speech. They will probably be disappointed; the Chancellor is unlikely to go much beyond the current formulation, in which interest- rate policy is guided by a range of indicators, including the money supply, asset prices and the exchange rate.

But while government strategy may lack an intellectually rigorous framework, the central thrust is not in doubt - it is going for growth and base rates will be coming down again.

The Bank of England has been struggling to keep a lid on base rate speculation. The belief that rates are to fall - and that the prices of government bills are thus to rise - has made the money market reluctant to accept the Bank's offers to buy bills to relieve daily shortages of funds in the banking system. The resulting scrabble for money at the end of the day has pushed overnight rates as high as 100 per cent in recent days. Yesterday the Bank had to signal unchanged rates after speculation about an imminent 2-point cut.

It is tempting to see the pound's fall of more than five pfennigs in two days as a response to talk of lower interest rates. But base rate cuts would probably do sterling more good than harm. The gloom in the CBI survey justifies lower rates, while the immediate threat of inflation is negligible.

The pound's difficulties are caused more by political uncertainty and by the belief that the timing of rate cuts is being dictated by political whim. This nervousness will remain at least until the Maastricht issue is resolved and the economy is clearly recovering - and neither condition is in prospect immediately. It would be no surprise if the pound threatened DM2.30 in the meantime.

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