George warns Clarke over 'gambling'

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Eddie George, the Governor of the Bank of England, yesterday warned the Chancellor of the Exchequer that if he gambled with the economy over interest rates he would risk making Britain "a poor man".

Tory MPs and the shadow chancellor, Gordon Brown, reacted with astonishment at the attack on Kenneth Clarke which shattered the show of unity 24 hours earlier over the first cut in interest rates in two years.

With Opposition politicians and the Chancellor's special adviser in the audience, Mr George told a press gallery luncheon at the Commons that on the balance of risk the Bank believed interest rates should have gone up another half per centage point in May.

"The Chancellor took a risk in not doing that and he got lucky. The Chancellor takes the view that we were being unneccesarily cautious. As things turned out, we were. But the point is it didn't actually need to turn out as it did and in our view, if you constantly take risks of that kind ... you will end up as a rather poor man," the Governor said.

His remarks were described as "crazy" by David Shaw, a vice-chairman of the Tory backbench finance committee, who has backed Mr Clarke by calling for more interest-rate cuts.

A senior minister said: "The Governor should have known better. It really is too much. The Chancellor is right to exercise his judgement. The Governor is acting as if we have an independent bank."

Mr Brown said: "After yesterday's show of unity, I am astonished by this pointed attack on the Chancellor's economic judgement."

Mr George said he found reports about his difference of view with the Chancellor "sometimes amusing but always pretty amazing". Compared with the disagreements in the Bundesbank and the United States Federal Reserve, they were enjoying a "love in", he said.

His remarks appear to overshadow his main message that interest rates may have peaked. He reinforced the conviction in the City and at Westminster that further modest interest-rate cuts are on the way in the new year.

The inflation figures yesterday provided more encouraging news for Mr Clarke. Headline inflation was down slightly in November, showing that Britain has now enjoyed the longest peacetime run of low inflation since the Thirties. The headline rate of inflation fell from 3.2 per cent to 3.1 per cent in November.