George warns of growth threat to inflation

The Governor of the Bank of England, Eddie George, warned yesterday that the Government risks missing its inflation target if growth is as buoyant as it hopes in the next 18 months, writes Diane Coyle.

Mr George's remarks raised the prospect of further disagreements over interest rates with Chancellor Kenneth Clarke in the coming months. Minutes of last month's monetary meeting, out today, are expected to show that Mr Clarke ignored the Governor's advice in deciding to cut base rates by a quarter point.

Mr George told the cross-party Treasury select committee of MPs yesterday he was more pessimistic than the Treasury about the outlook for inflation as consumer spending picks up. Consumer spending growth above 4 per cent was "not compatible with low inflation for very long", he said.

"At some point it would mean that monetary policy would need to be tightened ... Quite at what point and to what extent is something I could not speculate about."

Mr George said he was concerned, too, about the higher-than-expected level of government borrowing. Interest rates would have to respond if borrowing stayed too high at a time when the economy was growing rapidly.

The Governor defended the Bank's record in forecasting inflation, criticised by the Chancellor recently. "We've been on the high side but we have been more optimistic on inflation than most outside forecasters," he said.

Mr George said the Bank shared the Treasury's view about the general economic outlook, even if it disagreed on the precise figures. There would be an acceleration in demand, fuelled by consumer spending. Although the Bank's economists did not expect a big upturn in inflation, they thought inflation would be "somewhat stronger" than the Treasury forecast beyond the end of 1997.

He added that UK monetary policy had not gained as much in credibility as he had hoped it would.

"People in the financial markets still have to be persuaded that we will stick to inflation at 2.5 per cent," he said.

Independence for the Bank of England would improve credibility, he said, and help reduce the interest rate premium the British government must pay to borrow money.