View from City Road: No instant credibility for the Chancellor

As a step towards transparency in economic policy, Kenneth Clarke's decision to publish the minutes of monthly meetings at which he discusses interest rates with the Governor of the Bank of England - mirroring what the Fed has been doing in the US for years - can only be applauded.

No one, however, should be left with the impression that the initiative will confer instant credibility on Mr Clarke's anti-inflation policy in the eyes of financial markets.

Credibility, as the Bundesbank has demonstrated, can only be earned through years of success in meeting low inflation targets. With inflationary pressures returning as the recovery strengthens, it is still far too early to say whether the Government and the Bank of England are on course to emulate the Bundesbank's example.

The substance of the minutes published yesterday, which cover the first three meetings of the year, contain omens both good and bad.

First, they include a frank description of much-rumoured differences between the Governor and the Chancellor. This would suggest Mr Clarke would have some difficulty getting away with a rate cut for blatantly political purposes. It seems unlikely the Governor would allow his opposition to such a fix to be excised from the account of the meeting.

Second, and more worrying, the minutes for the February meeting at which it was agreed to cut rates by a quarter-point to 5.25 per cent show that the Chancellor was quite prepared to overrule the Governor's view that any rate cut 'would run a risk of higher inflation and some loss of credibility'.

The Chancellor said yesterday that it was 'plain as a pikestaff' that his decision had been correct, but the Governor said it was debatable whether the Bank had 'lost the argument or just the decision'. Only correct decisions will build up Mr Clarke's credibility, and February's was not one of them.