Clarke defends interest rates stand

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Pressure on the Chancellor to raise interest rates grew yesterday when Eddie George, the Governor of the Bank of England, said that they needed to rise ''sooner rather than later''.

The warning highlighted the apparent rift between the Governor and Kenneth Clarke, Chancellor of the Exchequer, who rejected his advice to raise base rates last Friday after the local elections.

Kenneth Clarke secured the strong support of Tory backbenchers when he and John Major both told the Commons they were sticking to their inflation target despite a blunt warning from the Bank that it could not now be achieved.

The Bank said the steep fall in the pound in the past few months meant the outlook for inflation was worse than it had been when it issued its last inflation report in February. It said the Government would miss its target of 2.5 per cent underlying inflation by the end of this Parliament.

Another rise in base rates from their current 6.75 per cent, now expected next month, would almost certainly trigger mortgage rate increases.

However, Mr George was careful to express support for the Government's anti-inflation policy when he addressed the British Chambers of Commerce in Aberdeen yesterday. He said Mr Clarke had made it clear that the macro- economic policies that had brought inflation down so far remained in place, but said: "Stability on occasion involves taking timely action which is unpopular."

Mr Clarke defended himself in a speech to the annual Cutlers' Feast in Sheffield last night. He said his decision not to move base rates was taken on economic grounds alone, and there was no change in economic policy.

''I remain committed to keeping inflation down. It has derailed the past three recoveries and I am determined that it will not derail this one,'' said Mr Clarke. And he said he would not hesitate to put interest rates up again if he judged it necessary to do so.

Pressed earlier in Commons Treasury Questions by Gordon Brown, the Shadow Chancellor, to "reaffirm in very clear words that the inflation target of 2.5 per cent by the end of the Parliament will not be changed", Mr Clarke said: "I have just said it will not be changed and there has been no change of policy."

Mr Brown gave a strong hint on BBC Radio's World at One that he is to propose ways of strengthening the independence of the Bank of England. Mr Brown, who claimed there was a "suspicion" that Mr Clarke had been overruled last week by John Major, and had then overruled the governor, said: "We need even more openness, because what has become clear is that the system is susceptible to political party pressure.''

Governor's warning, page 32