Ken and Eddie move further apart on rates

Click to follow
Kenneth Clarke and Eddie George, the two titans of economic policy, moved further apart on interest rates when they met a month ago, writes Diane Coyle.

Although the gap between them was only a quarter of a percentage point, Mr George emphasised the "significant" risk to the inflation target if base rates did not go up by that much soon, while Mr Clarke insisted that there was no sign yet of inflationary pressures.

According to minutes of their meeting on 4 September, published yesterday, the Governor said the short-term outlook for prices was favourable but demand was trending up. "That pointed to inflation picking up again in the course of next year, putting the inflation target at significant risk in 1998," he argued.

Economists read much significance into that "significant". "The Bank is girding itself up to recommend in no uncertain terms that rates be raised," said Geoff Dicks at NatWest Markets. He said this could be expected by the time it published its next Inflation Report on 6 November.

Mr George said the Bank would prefer a "marginally tighter" policy now and warned that the longer the delay, the bigger the increase that would be needed.

However, the Chancellor replied that there were no signs of unsustainably fast growth. He added that there was "certainly no sign of any housing market boom". The minutes record that, in a piece of creative interpretation of Mr George's remarks, "he was inclined to agree with the Governor that there was no case for moving interest rates in either direction on this occasion".

City analysts still reckon there is little chance that Mr Clarke will put up the cost of borrowing before the election, although almost all think the next chancellor will have to bite the bullet.

The economic evidence will continue to be mixed, as indicated by this week's figures showing flat manufacturing output in the first eight months of the year. The figures will not all be pointing in the same direction for some time.

However, the shape of the Budget and the strength of sterling are likely to influence the Bank of England's view. The pound has gained 1.5 per cent in value since the 4 September meeting, which will have the same effect as a small rise in interest rates if it is sustained. A cautious Budget would also allow Mr George to keep his powder dry.