If the Bank's analysis is half-way right, it means that the Chancellor has taken a tremendous gamble with the economy. Britain's ignominious exit from the ERM on Black Wednesday tarnished the Tories' reputation for competent economic management. Mr Clarke himself said at the time that the Government was in a hole. The overwhelming priority was to restore the party's reputation as a manager of the economy. If that meant taking short-term political unpopularity on the chin, so be it.
From that tough-sounding stance flowed the last two tough Budgets, which have done much to restore the public finances. From that also stemmed a tough inflation target and a step towards a more independent, if still ambiguous, role for the Bank of England. The Bank's leverage in the setting of interest rates was greatly strengthened by the decision to make public the minutes of the monthly meetings between the Chancellor and the Governor.
After yesterday's inflation report there can be little doubt what we will see when the minutes of last week's meeting are published in June. They seem certain to indicate that Eddie George did indeed want a rise in interest rates last Friday to combat the inflationary impact of the fall in the pound this year. In other words, he was overruled by the Chancellor.
What this whole episode looks like, therefore, is a government starting to dig its way back into that famous hole. The Chancellor and the Prime Minister risk the accusation that in a fit of electoral panic they took risks with inflation. That means they are taking risks that the prudence of savers will be punished and the excesses of the over-borrowed be rewarded. If a Conservative government cannot deliver sound money, it is hard to know what it can be expected to deliver.
Of course it could all still come right for Mr Clarke. The Bank has been consistently gloomy in its forecasts on inflation. It has no monopoly of wisdom on the inflationary prospects. But things could also turn sour. If the Bank believes, as it said yesterday, that the balance of risks now clearly points to an upsurge in inflation, the onus is on Mr Clarke to prove it wrong.
Like so many Chancellors before him, this one is talking tough on economic soundness but flinching from the painful decisions that are needed when an election year hoves into view. The risk is clear: a reigniting of an inflationary boom that can be halted only by another wrenching recession.
Here is a clear opportunity for New Labour when Gordon Brown unveils his thinking on the Bank of England next week. The Shadow Chancellor could steal a march on the Government by proposing genuine autonomy for a reformed Bank, one which is more representative, more accountable and required to take into account the overall state of the economy as well as inflation. Mr Major has opened another flank to his enemies.Reuse content