The Governor of the Bank of England appears to be toning down his demand for higher interest rates, it emerged last night.
While Eddie George continued to press for a rise in rates in his meeting with the Chancellor on 5 July, some City analysts detected a distinct cooling off in the stridency with which he pressed for a hike in base rates.
His relaxation was detected in the minutes of the latest meeting between the two, which were released yesterday, a day in which a CBI survey revealed a sharp reduction in business optimism across most regions in the country.
According to Geoffrey Dicks, UK economist at NatWest Markets, the latest minutes were "another instalment in the Governor's climbdown", marking "a distinct softening" in his approach.
Whereas in May Mr George said higher rates were called for immediately, now the demand had become less immediate - "before very long" according to the minutes. "The urgency of monetary tightening that the Governor saw in May is a thing of the past," Mr Dicks said.
The minutes revealed that Mr George continued to be concerned about cost and input price pressures. These "remained uncomfortably strong", with input prices up by 10 per cent on a year ago. With unit labour costs edging upwards, "the incentive to raise output prices clearly remained strong". Monetary growth, too, was picking up considerably, with narrow money growing at an annualised rate of 7.5 per cent in the three months to June and broad money continuing its "gradual acceleration since last autumn", according to the minutes.
On the other hand, the Governor conceded that "the real economy might be a little softer than would have been supposed two or three months ago. But it was too soon to be sure if this softer tone would persist. If it did then that would clearly ease concerns about inflation further ahead". The conclusion remained that "some further tightening of policy would be needed before very long to be reasonably confident of getting underlying inflation back below 2.5 per cent in 1997".
This advice was rejected by Kenneth Clarke who said "if anything, the balance of the data over the previous month had reinforced the view that interest rates should not be changed". The personal sector "remained subdued" and the housing market "flat". The labour market was improving but more slowly than last year. "Evidence on activity had tended to confirm his view that growth had slowed to a more sustainable rate," the minutes said.
Simon Briscoe, economist at Nikko Europe, said: "The Governor's view on the pace of economic expansion seems to be edging closer to the Chancellor's." Mr Briscoe said only worse-than-expected retail price inflation "will prompt a rate rise before Christmas".
Fresh evidence about the slowdown emerged in a regional trends survey of manufacturing from the CBI in conjunction with BSL, a regional economics consultancy. This showed the decline in business optimism in July was spread across all parts of the country bar Scotland. Pessimism was marked in the North, North-west, Yorkshire and Humberside and the South-east. However, in Northern Ireland, Scotland, the South-west and Wales, more industrialists were optimistic than pessimistic about the business outlook over the next four months.
Despite the decline in optimism in the survey, "investment intentions remained remarkably strong," said BSL director, Richard Holt. Firms in nine out of 11 regions were planning to increase spending on plant and machinery in the next 12 months.
The strength of investment intentions was particularly strong in the West Midlands and Wales. These two regions had also spearheaded the continuing increase in export demand across the country.