View from City Road: Clarke has not hit the brakes yet

Now that Kenneth Clarke has had the courage to raise interest rates, former Chancellors from Nigel Lawson onwards are crawling out of the woodwork to remind long-suffering voters and nervous financial markets that there is almost certainly more to come.

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.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K: SThree: SThree Group have been well esta...

Recruitment Genius: Call Centre Debt Collector - Multiple Roles

£21000 per annum: Recruitment Genius: This is an exciting opportunity to join ...

Guru Careers: Financial Director / FD / Senior Finance Manager

Up to 70k DOE: Guru Careers: We are seeking an experienced Financial Director ...

Recruitment Genius: Junior / Apprentice Sales Executives - OTE £50,000

£11000 - £50000 per annum: Recruitment Genius: This financial company offer ma...

Day In a Page

Turkey-Kurdish conflict: Obama's deal with Ankara is a betrayal of Syrian Kurds and may not even weaken Isis

US betrayal of old ally brings limited reward

Since the accord, the Turks have only waged war on Kurds while no US bomber has used Incirlik airbase, says Patrick Cockburn
VIPs gather for opening of second Suez Canal - but doubts linger over security

'A gift from Egypt to the rest of the world'

VIPs gather for opening of second Suez Canal - but is it really needed?
Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

Fashion editor, Alexander Fury, applauds a man who clearly has more important things on his mind
The male menopause and intimations of mortality

Aches, pains and an inkling of mortality

So the male menopause is real, they say, but what would the Victorians, 'old' at 30, think of that, asks DJ Taylor
Man Booker Prize 2015: Anna Smaill - How can I possibly be on the list with these writers I have idolised?

'How can I possibly be on the list with these writers I have idolised?'

Man Booker Prize nominee Anna Smaill on the rise of Kiwi lit
Bettany Hughes interview: The historian on how Socrates would have solved Greece's problems

Bettany Hughes interview

The historian on how Socrates would have solved Greece's problems
Art of the state: Pyongyang propaganda posters to be exhibited in China

Art of the state

Pyongyang propaganda posters to be exhibited in China
Mildreds and Vanilla Black have given vegetarian food a makeover in new cookbooks

Vegetarian food gets a makeover

Long-time vegetarian Holly Williams tries to recreate some of the inventive recipes in Mildreds and Vanilla Black's new cookbooks
The haunting of Shirley Jackson: Was the gothic author's life really as bleak as her fiction?

The haunting of Shirley Jackson

Was the gothic author's life really as bleak as her fiction?
Bill Granger recipes: Heading off on holiday? Try out our chef's seaside-inspired dishes...

Bill Granger's seaside-inspired recipes

These dishes are so easy to make, our chef is almost embarrassed to call them recipes
Ashes 2015: Tourists are limp, leaderless and distinctly UnAustralian

Tourists are limp, leaderless and distinctly UnAustralian

A woefully out-of-form Michael Clarke embodies his team's fragile Ashes campaign, says Michael Calvin
Blairites be warned, this could be the moment Labour turns into Syriza

Andrew Grice: Inside Westminster

Blairites be warned, this could be the moment Labour turns into Syriza
HMS Victory: The mystery of Britain's worst naval disaster is finally solved - 271 years later

The mystery of Britain's worst naval disaster is finally solved - 271 years later

Exclusive: David Keys reveals the research that finally explains why HMS Victory went down with the loss of 1,100 lives
Survivors of the Nagasaki atomic bomb attack: Japan must not abandon its post-war pacifism

'I saw people so injured you couldn't tell if they were dead or alive'

Nagasaki survivors on why Japan must not abandon its post-war pacifism
Jon Stewart: The voice of Democrats who felt Obama had failed to deliver on his 'Yes We Can' slogan, and the voter he tried hardest to keep onside

The voter Obama tried hardest to keep onside

Outgoing The Daily Show host, Jon Stewart, became the voice of Democrats who felt the President had failed to deliver on his ‘Yes We Can’ slogan. Tim Walker charts the ups and downs of their 10-year relationship on screen