View From City Road: Labour credibility at a stroke

Can the City trust Tony Blair? The Labour leader yesterday seemed to signal a startling shift in party policy by refusing to condemn Monday's half-point rise in interest rates. Instead he concentrated on blaming the Government for underlying weaknesses in the economy. Every other rise in interest rates since the Conservatives came to power in 1979 has been condemned as a matter of course as a thoroughly bad thing by Labour. This time round Mr Blair has carefully avoided such a knee-jerk reaction. Has Labour, or more particularly Mr Blair, been converted to the cause of monetary conservatism?

The City is going to take a lot of convincing. Since becoming leader Mr Blair has insisted on speaking his mind even if that means running counter to accepted doctrines and practices. What Mr Blair says does not necessarily reflect party policy. It seems eminently possible that John Prescott, the deputy leader, will within days come out with something diametrically opposed.

The fact remains that however far Mr Blair moves towards accepting the basic principles of the Government's anti-inflation policy, the City is going to remain deeply suspicious of any incoming Labour government. An immediate sell-off in bonds, the pound and shares is certain. Labour would thus start any term of office with a big handicap. Markets would be much less forgiving than they are with the Tories. Gaffes and blunders would receive double punishment.

So far Labour has been as reluctant as the Government to back the case for a fully independent central bank, though it has committed itself to the half-way house approach of continued publication of the monetary meeting minutes. Yet paradoxically, embracing fully fledged independence may offer the best hope of preventing markets strangling Labour's policies at birth. At a stroke it would give Labour a monetary credibility it will otherwise find hard to achieve. Certainly this is the argument Eddie George, Governor of the Bank of England, will be urging on Mr Blair as the Labour leader begins to articulate his approach to the economy in ever more daring language.