Defiant Clarke prepares to cut interest rates

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The Independent Online
KENNETH CLARKE, the new Chancellor, is considering a half per cent interest rate cut this summer, despite opposition from a strong body of orthodox Treasury opinion.

Mr Clarke is more favourably disposed to a cut in rates than his predecessor, Norman Lamont. The pound has strengthened recently on the foreign markets and its rise could be sharply reinforced if the Germans cut interest rates during the next month. A cut in British rates would then be probable.

Mr Clarke promised in his Mansion House speech on Wednesday that he would favour business and industry.

Senior Treasury officials are deeply split on how far the Chancellor's pledge to nurture commerce should be allowed to influence exchange rate policy. While a majority favour current rates, a significant minority of top advisers believe that too strong a pound could hamper the prospects of an export-led recovery, by making British goods too expensive on overseas markets.

Mr Clarke made clear in his Mansion House speech that, despite the paramount importance of low inflation, it was not enough on its own. One Cabinet colleague said yesterday that Mr Clarke would not be 'theological' about interest rate policy. Mr Clarke is also taking seriously the growing balance of payments deficit, which needs to be tackled by an increase in exports to recession-hit European countries.

Any interest rate cut would almost certainly run into opposition from such figures as Lord Lawson, the former chancellor, who on Friday cast doubt on the policy of 'going for growth'.

But the rate cut would be welcomed by some sections of the Tory right as well as by left-wingers who fear the recovery is still fragile. Despite the series of encouraging indicators last week, Mr Clarke told colleagues at Thursday's Cabinet that the recovery was still 'patchy'.

An interest rate cut is unlikely before the Christchurch by-election - expected at the end of July - for two, contradictory, reasons. Ministers are determined to avoid any suggestion of a cut for political reasons - particularly after Mr Lamont's attack on manipulation of interest rates for political ends in his resignation speech. But a cut could backfire in a constituency in which 34 per cent of voters are retired and already face savings income losses because of the fall in rates.

Mr Clarke will not sanction a cut if there is a risk of having to increase them again. But much will depend on his progress in cutting spending. Mr Clarke has pledged to stick by the manifesto but that leaves open the possibility of restructuring mortgage interest tax relief and even taxing child benefit

Christopher Huhne, Business