Governor opposed Chancellor's interest rate cut

Click to follow
Eddie George, the Governor of the Bank of England, opposed the quarter- point cut in interest rates last month, minutes of his meeting with the Chancellor showed yesterday.

As a fall in earnings inflation appeared to back the decision to cut rates, Kenneth Clarke, the Chancellor, played down differences with Mr George, saying both of them were "extremely strongly committed" to curbing inflation.

"I think the inflation record that I quoted, our best for 50 years, shows that the Ken and Eddie Show is a very successful team performance," Mr Clarke said in a parliamentary debate yesterday.

He added: "Six weeks ago the Governor and I differed by just one-quarter per cent. The Governor agrees that by any standards it is a narrow debate."

The minutes of the monetary meeting on 5 June say Mr George took the view that if "rates were reduced now, in order to guard against the risk to activity in the short term which then failed to materialise, then this would simply exacerbate the potential inflation pressure further ahead by adding to domestic demand which already - on the evidence currently available - looked set to accelerate.''

The Bank's advice was to leave interest rates unchanged for the time being, and that was what financial markets expected, the minutes added. A number of analysts said yesterday they now believed Mr Clarke would shave at least another quarter point off the current base rate of 5.75 per cent.

The June meeting was the first at which the Governor had opposed a cut in interest rates by Mr Clarke, though they have had an argument about the direction of rates before.

In May 1995 Mr George urged Mr Clarke to raise rates a half point but was ignored, and by September he conceded that an increase was no longer required.

Mr George came into line with Mr Clarke in December, January and March when he agreed with the Chancellor's three small cuts in base rates.

But since March, Mr George's concerns about the pace of growth and the risk to inflation have been rising, which he has made clear in public both in his quarterly Inflation Report and in evidence earlier this week to the commons Treasury committee.

The minutes spell this argument out in more detail. The Chancellor maintained that "the further evidence of a lack of cost pressures had improved the outlook for inflation; and he was content that a quarter per cent cut was sufficiently small not to cause any significant inflationary risk, while reducing the downside risks to the recovery. If consumer demand started growing too strongly, and put the inflation target at risk, then rates could be raised when this became evident."

One City view was that the surprise fall in the underlying rate of average earnings growth to 3.5 per cent in May from 3.75 per cent in April could help justify another cut.

Unemployment also fell by 14,300 in June but the jobless rate was unchanged at 7.7 per cent of the workforce.

Comment, page 21