Mr Clarke can't have it both ways
Thursday 14 March 1996
The white-socked, rainbow-jacketed futures traders whose business is to make a profit from guessing the future level of base rates have bad news for the Chancellor. They reckon the cost of borrowing has bottomed out and will have to start climbing by the Autumn.
Even worse, in a serious thumbs down for the current anti-inflationary strategy, their expectations for inflation and interest rates further down the road have significantly worsened since the latest quarter point reduction in rates.
By contrast, the City is awash with posh commentators who think the economy is frail and urge Mr Clarke to slice base rates by another point to 5 per cent. Yesterday's news of a small increase in the unemployment claimant count last month after 29 successive falls was more grist to their mill. But the weight of money is against these scribblers.
This is not just because the financial markets are packed with inflation hawks who think Eddie George has let the side down by accepting the recent flurry of rate cuts. The indicators of economic weakness, mainly in manufacturing, grab the headlines, but there are other indicators of buoyancy.
The minutes of the monthly meeting between the Chancellor and Governor disingenuously suggest that it is only the money supply that is flashing amber, while everything else has been green for go on reductions in base rates. This does not address a whole range of other forward-looking economic indicators such as share prices, land values and house prices. Nor does it comfort monetarists like Professor Tim Congdon, a Treasury ``wise man'', whose recent forecast says double-digit monetary growth could take the inflation rate back towards 10 per cent.
As Mr Clarke keeps saying, the economy is likely to pick up this year for all sorts of reasons. The market response is that he can not have it both ways; if consumer spending grows any faster, base rates will not be able to fall any further. All that is needed now to put the kybosh on all lingering hope of still cheaper borrowing rates is a sterling crisis. As political uncertainty grows, that's a real risk.
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