Kenneth Clarke, the Chancellor, is a man of irrepressibly optimistic views about the economy. He loses no opportunity to say that the outlook for growth is favourable and inflation is the lowest for a generation.
These rosy prospects have not stopped him reducing interest rates on the grounds that the economy has weakened significantly. However, buoyant monetary conditions mean these rate cuts could prove an inflationary time- bomb for the Chancellor.
Mr Clarke held fire after yesterday's monthly meeting, rather than risk another clash with Eddie George, the Governor of the Bank of England. A third reduction in the cost of borrowing in as many months would have come as a surprise after minutes of the December meeting indicated that Mr George disagreed with the quarter-point cut in January. The Governor was concerned about the behaviour of the broad money measure, M4.
Mr George has been criticised for worrying too much about money growth when the economy has weakened so much. But at the monthly meetings between Bank and Treasury officials a decade ago, the predecessor of today's high- profile summits between the Chancellor and Governor, monetary indicators were at the top of the list of factors influencing interest rate decisions. These included growth in broad and narrow money, the exchange rate, share prices and house prices adjusted for inflation, and land values.
Few City scribblers pay attention to these monetary indicators now but many of them are flashing a warning against interest rate cuts. Tim Congdon of Lombard Street Research, a monetarist member of the Treasury's independent panel of forecasters, said: "We are not as far down the inflationary route as we were 10 years ago, but the similarities are certainly there."
Steven Bell, director of research at Deutsche Morgan Grenfell, said: "Even if you are not a monetarist, you have to ask now which risk would we rather take. Monetary policy too tight, taking a risk with growth when we know there are tax cuts and consumer windfalls this year? Or monetary policy too loose, taking a risk with inflation?"
The key worry is the broad money supply expanding at nearly 10 per cent, while cash in circulation is rising at a steady rate close to 6 per cent. Faster economic growth would soak up some of this money, but it could also trigger higher inflation.
Asset prices have already risen sharply. Shares have climbed 23 per cent during the past 12 months and are at their highest, after inflation, since 1973. The price of gold is near a 10-year high.
Even house prices, adjusted for inflation, remain higher than they were a decade ago and the Halifax price index has climbed for five months running.