View from City Road: Clarke has not hit the brakes yet
Thursday 15 September 1994
Norman Lamont has forecast that rates will head towards 7 per cent over the next year, while Nigel Lawson - who must take a fair amount of the blame for getting us into this mess in the first place - said yesterday that Monday's half-point increase was 'most unlikely to be the last'. Neither of these gentlemen proved particularly adept at handling monetary policy when in charge, but then it always was much easier to diagnose than operate. Their analysis as outsiders, it has to be said, looks about right.
The fact that there are more rate increases to come does not imply, as the more churlish City analysts were suggesting yesterday, that Mr Clarke has moved too late. With the exception of the partial unwinding of interest rate cuts in the wake of the 1987 stock market crash, this is the first time in recent memory where an upward turn in interest rates has not been forced on the authorities by an attack on the pound. Mr Clarke, with the Governor of the Bank of England breathing over his shoulder, is leading the markets rather than following them.
Neither do yesterday's economic figures imply, as one analyst suggested, that 'the horse has bolted'. August's rise in inflation was unexpected, but not dramatic. There is no reason to disbelieve Mr Clarke's claim that the figures had no impact on Monday's decision. Even if inflation had fallen again last month, Monday's rise in rates could still have been justified.
Past experience shows that once interest rates begin to rise, they can do so dramatically. In 1984/5 they rose by 5.5 percentage points in nine months and in 1988/9 by 4.5 percentage points in three months. By acting early, Mr Clarke will hope that the eventual increase need not be so great.
In this sense, slowing the economy to restrain inflation is like slowing a speeding car that is approaching a brick wall. The earlier you take your foot off the accelerator, the less sharply you need to hit the brake. But it is important to remember that Monday's move means only that Mr Clarke is no longer pressing the accelerator hard to the floor.
In the coming months he will have to raise rates again until monetary policy is neither pressing on the accelerator nor on the brake. This implies, as Mr Lamont has suggested, perhaps one more rise in base rates this year and then a gradual increase to 7 per cent or so during next year.
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