The Chancellor has beaten the Governor by a knock-out

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The Independent Online
The battle of Threadneedle Street is over as far as the City is concerned. Eddie George, Governor of the Bank, won round one in early May when Kenneth Clarke first denied his request for a rise in base rates. The pound fell and the Chancellor was heavily criticised for allowing politics to influence an economic decision in the wake of the Conservatives' disastrous local government elections. Since then, however, the Governor of the Bank of England has had to endure one blow after another, climaxing with the knockout of the economic statistics of the past few days.

But when Eddie George first raised the standard for higher rates, he had strong support. The National Institute of Economic & Social Research, the respected economic think-tank, backed him in its May review. Three months later, the Institute says interest rates can be left unchanged without leading to a material breach in the Government's target of 2.5 per cent underlying inflation in two years' time.

The fact is, the economic arguments have gone the Chancellor's way, not the Governor's. It would be surprising if the Bank is not now preparing to throw in the towel. When the minutes of their meeting at the start of July were recently released, Eddie George had notably toned down his demand for higher rates. There was nothing of the urgency with which he called for a rise in rates three months earlier.

Victory may have gone to Kenneth Clarke, but the battle has damaged both the Chancellor and the Governor. Mr Clarke's controversial decision in May remains branded as a political one which was subsequently and surprisingly validated by helpful economic data. The markets remain watchful of a Chancellor who refused to bite on the Governor's bullet.

But Eddie George has been the most wounded. Concerns in the Labour Party that the Bank is too willing to cry wolf on inflation have apparently been confirmed. The new transparency of decision-making between the two men was seen as a test of the Chancellor's credibility. It has turned out to just as much a test of the Governor's.