No big gestures please, Ken

Share
Related Topics
Today will be the first time the Chancellor and the Governor of the Bank of England have met since the Budget. After failing to deliver huge tax cuts last month, Kenneth Clarke is under political pressure to cut interest rates instead.

Economic evidence has been mounting in favour of such a cut. Several factors suggest the economy is weak and in need of a boost. Economic growth and inflation are both lower than expected. Manufacturing industry looks fragile. Export markets don't look promising. The US and Germany face a slowdown and are likely to cut their interest rates in the next few months. The gloomiest economists even argue that Britain is heading back into recession and should cut its own interest rates as far and as fast as possible.

As always, however, there are countless other economists who take a different view. Down at the Bank of England, they are worried that inflation might be about to pick up. They fear that we could be set for an upward spiral in wage settlements next year. If this is right, inflation looms. Cutting interest rates now would only fuel price rises.

The trouble is that no one knows who is right. Economists are picking their way through a mire of conflicting evidence. We could be on the brink of a boom or on the verge of collapse. Worse, policy changes that Ken Clarke and Eddie George decide today will not have their full impact on the economy for about two years.

Faced with this uncertainty, what advice should Eddie give, and what action should Ken take?

The Bank clearly feels bruised by its encounter with the Chancellor in the summer. Eddie George called for an interest rate increase. Kenneth Clarke resisted and turned out, against the odds, to be right. The combination of being ignored and being wrong has damaged the Governor's credibility. As a result Mr George will be tempted to tone down his remarks and avoid any conflict.

This would be a serious mistake. The Bank of England is responsible for watching inflation like a hawk, resisting short-term political pressures, and advising the Government on how to meet its inflation target. It would be far more damaging to the Governor's credibility if he was thought to be second-guessing the politicians than if he were to be overruled once more.

It is the Chancellor who will make the final decision. Mr Clarke would be foolish to make large cuts in interest rates until we are sure that wages won't escalate. However, should interest rates in Germany or the US fall in the new year, then there would certainly be a case for following these with cuts of our own.

In the Budget, Mr Clarke gave voters a taste of the tax cuts they wanted without jeopardising the economy or the public finances. The Chancellor showed admirable political self-restraint in putting the national interest before the party interest.

He could do the same with interest rates. A small cut in interest rates now - perhaps a quarter of a point - is likely to have little impact on the risk of inflation while making a political gesture in the direction of a bigger cut next year. That would give Mr Clarke time to see which way the economy is really going.

Is the problem really inflation or recession? The economic jury is still out.

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Recruitment Genius: Sales Executive - OTE £30,000+

£16000 - £30000 per annum: Recruitment Genius: They are looking for individual...

Recruitment Genius: IT Project Coordinator / Manager

£25000 - £40000 per annum: Recruitment Genius: A Project Coordinator is requir...

Recruitment Genius: Mortgage Advisor - OTE £95,000

£40000 - £95000 per annum: Recruitment Genius: This is an exciting opportunity...

Recruitment Genius: Trainee Vehicle Inspectors / Purchasers

£20000 - £40000 per annum: Recruitment Genius: Trainee Vehicle Inspectors / Pu...

Day In a Page

Read Next
The possibility of Corbyn winning has excited some Conservatives  

Labour leadership: The choice at the heart of the leadership campaign

Jeremy Corbyn
Pablo Iglesias, the leader of Spain’s anti-austerity party Podemos  

Greece debt crisis: Trouble is, if you help the Greeks, everyone will want the same favours

Charlotte McDonald-Gibson Charlotte McDonald-Gibson
Greece debt crisis: EU 'family' needs to forgive rather than punish an impoverished state

EU 'family' needs to forgive rather than punish an impoverished state

An outbreak of malaria in Greece four years ago helps us understand the crisis, says Robert Fisk
Gaza, a year on from Operation Protective Edge: The traumatised kibbutz on Israel's front line, still recovering from last summer's war with Hamas

Gaza, a year on from Operation Protective Edge

The traumatised kibbutz on Israel's front line, still recovering from last summer's war with Hamas
How to survive electrical storms: What are the chances of being hit by lightning?

Heavy weather

What are the chances of being hit by lightning?
World Bodypainting Festival 2015: Bizarre and brilliant photos celebrate 'the body as art'

World Bodypainting Festival 2015

Bizarre and brilliant photos celebrate 'the body as art'
alt-j: A private jet, a Mercury Prize and Latitude headliners

Don't call us nerds

Craig Mclean meets alt-j - the math-folk act who are flying high
How to find gold: The Californian badlands, digging out crevasses and sifting sludge

How to find gold

Steve Boggan finds himself in the Californian badlands, digging out crevasses and sifting sludge
Singing accents: From Herman's Hermits and David Bowie to Alesha Dixon

Not born in the USA

Lay off Alesha Dixon: songs sound better in US accents, even our national anthem
10 best balsamic vinegars

10 best balsamic vinegars

Drizzle it over salad, enjoy it with ciabatta, marinate vegetables, or use it to add depth to a sauce - this versatile staple is a cook's best friend
Wimbledon 2015: Brief glimpses of the old Venus but Williams sisters' epic wars belong to history

Brief glimpses of the old Venus but Williams sisters' epic wars belong to history

Serena dispatched her elder sister 6-4, 6-3 in eight minutes more than an hour
Greece says 'No': A night of huge celebrations in Athens as voters decisively back Tsipras and his anti-austerity stance in historic referendum

Greece referendum

Greeks say 'No' to austerity and plunge Europe into crisis
Ten years after the 7/7 terror attacks, is Britain an altered state?

7/7 bombings anniversary

Ten years after the terror attacks, is Britain an altered state?
Beautiful evening dresses are some of the loveliest Donatella has created

Versace haute couture review

Beautiful evening dresses are some of the loveliest Donatella has ever created
No hope and no jobs, so Gaza's young risk their lives, climb the fence and run for it

No hope and no jobs in Gaza

So the young risk their lives and run for it
Fashion apps: Retailers roll together shopping and social networking for mobile customers

Fashion apps

Retailers roll together shopping and social networking for mobile customers
The Greek referendum exposes a gaping hole at the heart of the European Union – its distinct lack of any genuine popular legitimacy

Gaping hole at the heart of the European Union

Treatment of Greece has shown up a lack of genuine legitimacy