Treasury 'wise men' split on interest rates

Economics: advice on inflation and employment
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The Independent Online

Economics Correspondent

The Treasury's panel of independent economists is evenly split on whether or not a rise in base rates is needed soon, according to their latest assessment of the economy. There could hardly be a clearer illustration of the Chancellor of the Exchequer's view that the decision on interest rates earlier this month was ''finely balanced''.

Three of the six forecasters - Andrew Britton (National Institute of Economic & Social Research), David Currie (London Business School) and Gavyn Davies (Goldman Sachs) - said Mr Clarke's failure to raise base rates was a tactical error. All three saw inflationary dangers stemming from the pound's fall this year. Professor Currie saw sterling's weakness as a direct result of the lack of credibility in monetary policy, and thought a rise in interest rates would help the exchange rate recover.

The others said Mr Clarke had made the right choice on 5 May, but for a variety of reasons. Tim Congdon (Lombard Street Research) said that the exchange rate would recover, and domestic demand was weak. Wynne Godley (Cambridge University) thought spending cuts or higher taxes would be a better way to tighten policy if the economy was still growing fast enough to lead to higher inflation. Patrick Minford (Liverpool University) saw little inflationary pressure and said monetary policy was already too tight.

The panel's forecasts for 1996 split along the same lines. Those who said interest rates would have to rise to keep inflation within the target predicted slower growth in 1996 than the 3 per cent they expect on average this year. The other three forecast no slowdown. The lower pace of current growth is ''the pause that refreshes,'' according to Mr Congdon.

Professor Minford found himself in a minority of one on the question of tax cuts. He said the ''healthy underlying position'' of the public finances justified tax cuts, perhaps of the order of pounds 20bn in total. A fellow panelist described this view as ''barmy''.

All the other five members thought there was little scope for lower taxes unless fully matched by spending cuts - although they included small tax reductions in their forecasts as a matter of political realism.