Defiant Clarke stands by interest rates strategy

Kenneth Clarke, the Chancellor of the Exchequer, yesterday strongly reaffirmed his determination not to shrink from "tough decisions" as his credibility faces a stiff test this week from expected exchange-market pressure on the pound.

Mr Clarke's strong defence of his economic strategy - including his decision not to raise interests rates last Friday - came as Malcolm Rifkind, the Secretary of State for Defence, admitted that he was unwilling to predict a Tory general election victory after last week's "appalling" local election results.

Pointing out that he had raised base rates three times in five months, the Chancellor restated the Government's inflation target of 1 to 4 per cent and added: "The policy is working, it is actually making our growth more sustainable."

Although currency markets are closed in Britain today because of the VE Day celebrations, markets around the world are open and the pound is expected to weaken significantly. Some analysts believe Mr Clarke could be forced into an embarrassing U-turn and raise rates.

However, Downing Street dismissed as "rubbish" speculation that his position was in any doubt, and senior Tories pointed out that his right-wing opponents are precisely those who would have most criticised an interest rise on Friday.

Mr Rifkind yesterday coupled his unusually candid refusal to make "foolish claims" for a Tory election victory with a declaration that they could do so but that it would mean a "very, very, hard slog".

He said on Jonathan Dimbleby's programme on ITV yesterday: "We have an obligation to those who voted for us at the last election, if it is responsible, to reduce taxes to try and resolve that very understandable sense of grievance that people have."

Michael Portillo, champion of the Euro-sceptic Cabinet right, went further, insisting that the Government had to promote core Conservative values, including its belief in national parliamentary sovereignty.

He told BBC Radio 4's World at One: "Because we have had to do things like put up taxes we have upset numbers of our supporters who otherwise would be with us today . . . Over the next two years we have to apply the policies that will win them back."

John Major did little to discourage speculation about the replacement of the party chairman, Jeremy Hanley, by indentifying in an interview with the Mail on Sunday "lack of communication" as a key factor in the party's failure last Thursday. While several of his colleagues strongly defended Mr Hanley, there was growing speculation that he expected to be moved in a summer reshuffle.

Lib Dems shift, page 7