The Chancellor's robust defence of his decision not to raise rates on 5 May, contrary to the advice of Eddie George, Governor of the Bank of England, has been justified. But have events also re-established the credibility of current monetary arrangements?
The optimistic interpretation is that the benign outcome proves the arrangements are emerging from a difficult adolescence into full maturity. They have coped with the big test, disagreement between the Chancellor and Governor without a major attack on the currency. What's more, the judgements so far have been right. The economy is still doing well; inflation has been lower for longer than at any time since the early 1960s. Full-blown optimism would be dangerous, however. If monetary policy is just a matter of judgement - and it has turned out that it is, indeed, just a matter of Mr Clarke's judgement - those judgements can be wrong as well as right.
The great appeal of the Ken and Eddie show for the financial markets was precisely that the new arrangements seemed to remove some of the scope for touchy-feely policy making. It exposed the Chancellor to the discipline of embarrassment if he rejected the Governor's hard-line advice. Trust Mr Clarke to brazen it out. On the other hand, the Chancellor's seeming nonchalance about the details of the inflation target may concern. There is no doubt that he wants to do well, but he gives the impression of believing that if inflation does breach the top of the tight 1-2.5 per cent target range, it won't matter too much. This may be no more than good politics. It clearly makes sense to prepare the electorate for failure to meet the target. Britain's inflation performance will still be better than at any time in recent history; the cost of squeezing it a bit more to come within target might be punitive. Even so, a Chancellor prone to the belief that targets are notthat important provided you are in the ball park is bound to worry the markets a little.
Mr Clarke will get the chance to dispel this impression when he extends the inflation target, probably in next month's Mansion House speech. He will get another chance later in the year, when growth still above-trend will most likely necessitate higher base rates.