Treasury seeks swifter rate cuts
Sunday 20 February 1994
The quarter-point cut led to a sharp fall in both the pound and government bonds, increasing the financing cost of the Government's borrowing requirement. Critics believe that the mishandling of the move damaged the authorities' reputation for fighting inflation.
'I am in favour of an independent central bank deciding interest rates, but I would not hand control to the present team at the Bank of England,' said one Whitehall source.
The Bank is in the firing line because it waited six days to carry out the Chancellor's instructions. The cut was widely seen as being motivated more by the Government's political troubles than sound economics.
Relations between the Treasury and the Bank were already strained, because the Bank had strongly resisted the Chancellor's request for a half percentage point cut.
The Bank's position looks increasingly odd in the wake of last week's rise in unemployment, fall in manufacturing output, better-than-expected inflation and cut in German interest rates.
The cut created confusion, in part because it coincided with the publication of the Bank's Inflation Report on 8 February, which was prepared on the assumption that interest rates would remain unchanged at 5.5 per cent. The report argued that inflation was likely to stay in the top half of the Government's 1-4 per cent target range, although the Government was committed to steering it into the bottom half. And it said there was a greater risk of a rise in inflation above that level than of a fall.
Last week's figures show that the Bank appears to have overestimated inflation for the fifth time in just six forecasts. It predicted that retail inflation excluding mortgages would be 3 per cent in January. In fact it was 2.8 per cent.
Last year, the Bank was given the freedom to decide the timing of interest rate cuts so long as it does so before the next monthly monetary meeting with the Chancellor.
A spokesman for the Bank said there were no regrets, either about the quarter percentage point cut or the timing of it. It made sense putting the decision to cut rates in the context of an analysis of the balance of risks in the inflation report.
In the City, the leading gilts market economist Roger Bootle said this weekend that the Chancellor would probably cut bank base rates to 4 per cent.
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