George holds out for rates rise

Economy: End to Tory uncertainty and early Wall Street record send the Footsie soaring

PAUL WALLACE

AND DIANE COYLE

The Governor of the Bank of England, Eddie George, told a Commons commitee yesterday that he was sticking by his advice that interest rates should rise. The indication came only hours after his monthly meeting with the Chancellor of the Exchequer produced no increase in base rates.

Mr George said yesterday that, as matters stood, it was "less likely rather than more likely" that the Government would achieve its inflation target. After a leadership election widely seen as heralding a lurch towards easier monetary and fiscal policy, the Governor also warned that tax cuts which led to an increase in the Public Sector Borrowing Requirement would have to be offset by tougher interest-rate policy.

Mr George's forceful remarks, made in evidence to the Treasury and Civil Service Select Committee on the Treasury's summer economic forecast, will be widely interpreted as a shot across the Government's bows. They will raise expectations of further clashes between the Chancellor and the Governor in the months ahead.

Mr George rammed home the message that Britain's record as an inflationary sinner meant that the Government had to err on the side of caution. That track record meant that "we do have a credibility problem", he acknowledged. The temptation in the past had been to take risks with inflation. It was "absolutely vital" therefore that the authorities were seen as being not prepared to take risks again.

Asked about the outcome of the May meeting when Kenneth Clarke turned down the Governor's advice to raise interest rates, Mr George denied he had cried wolf.

The Governor used the occasion to underline in no uncertain terms the Bank's strict interpretation of the inflation target. "I think we are now firmly anchored," he said, on an inflation target of 2.5 per cent or less. He denied that the Chancellor's speech at Mansion House and his briefing on it for backbenchers, in which he held out the possibility that inflation might on occasions exceed 4 per cent, had eased the commitment to the target.

Mr George described as "rubbish" the suggestion made by many commentators that the Government's inflation target had been changed.

He said that it would be "intolerable" and "very damaging for confidence" if the Government had in practice a different objective.

Mr George warned that "an irresponsible relaxation of fiscal policy" would be a grave concern. Asked about an increase in the PSBR as a result of tax cuts, he indicated that interest rates would have to rise. The expectation was "that interest rates would have to be higher to offset it".

Yesterday's economic statistics again highlighted the slowdown in growth. Housing starts by the private sector in the three months to May were 14.5 per cent lower than a year earlier, and 7.2 per cent lower than in the previous three months.

The longer leading index of cyclical indicators fell for the 11th month in succession, a typical pre-recession pattern.

Mr Clarke is due to give his evidence to the select comitteee this afternoon.

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