Split over interest rate

Chancellor and Governor review mixed signals on inflation
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Kenneth Clarke, the Chancellor, and Eddie George, Governor of the Bank of England, are believed to be split about the timing of the next rise in base rates. Mixed signals yesterday on the inflationary dangers facing the economy emphasised the dilemma facing the two men when they meet on Thursday.

Mr Clarke has recently been suggesting that the need for another increase in interest rates has been exaggerated, despite a run of figures pointing to strong growth and creeping inflation.

However, City economists are near-unanimous in thinking the Bank will press for higher rates this week. Soundings of officials in the Treasury and Bank indicate that there is a difference of opinion on timing.

A new inflation indicator published for the first time yesterday by the Chartered Institute of Purchasing and Supply confirmed that price pressures are building up.

The CIPS report, based on questionnaires sent to purchasing managers in industry, concludes: "Inflationary forces are running strongly in the economy and it does look likely that inflation will tend towards the higher rather than the lower end of the Government's target band over the next 12 months." It said inflation pressures were far stronger than official statistics suggested.

The CIPS finding follows faster increases in factory gate and retail prices in December. Other recently published figures have also suggested that the economy might still be growing too fast. The growth of national output in the final quarter of last year was only a fraction slower than in the previous quarter.

Looking ahead to the next four months, the Confederation of British Industry's latest survey found orders and business confidence at their most buoyant for years. At the same time, companies said they had cut back their investment plans, raising the spectre of capacity bottlenecks.

On top of these domestic concerns, a probable US interest rate increase this week, and possible German move, could put sterling under pressure if Britain did not follow suit.

The policy picture is clouded, however, by signs that some parts of the economy are very weak.

Yesterday figures for the narrow measure of the money supply, M0, showed an unexpected fall this month. Its year-on-year rate of growth slipped from 6.7 per cent to 6.4 per cent - still well above the top of the 0-4 per cent monitoring range.

Separate statistics on mortgage lending by the big British banks provided mixed evidence on the housing market. Net lending for house purchase was the same in December as November. For the fifth month running the value of home loans approved was higher than in the same month the previous year.

On the other hand, new approvals were well down in December, probably for seasonal reasons. More worrying was a fall in the actual number of first-time buyers, the key to getting the housing market moving.

City analysts thought Mr Clarke and Mr George would settle on opposite horns of the policy dilemma created by the mixed economic evidence.

Outlook, page 25