Bank's 'panic' warning prompted rise in rates

THE GOVERNOR of the Bank of England warned early last month that a sterling crisis could force a panic rise in interest rates within three weeks or so if the Chancellor did not raise rates immediately.

Eddie George's worries emerged yesterday in the minutes of his meeting with Kenneth Clarke on 7 September. The Chancellor agreed that delaying a rate rise risked trouble in the financial markets and raised rates after taking two days to think it over.

Both men agreed there was little danger of an early upsurge in inflation. But official figures released yesterday showed the price of industry's raw materials rising sharply and the strongest quarterly jump in underlying factory goods prices for three years.

Fuel and raw material prices rose by 0.7 per cent in September after adjusting for seasonal effects, according to the Central Statistical Office. This reflected the recent strength of commodity prices. Input prices have grown by 5.7 per cent over the last year, with prices for metals and food manufacturing materials rising sharply.

The CSO also reported that manufacturers have been increasingly successful in forcing higher prices on their customers, as predicted by the Confederation of British Industry's monthly industrial surveys. Factory gate prices rose 2.4 per cent in the year to September, the quickest since March.

Adjusting for seasonal effects and excluding the food, drink, tobacco and petrol industries - for all of which prices are affected by Budget changes in excise duties - manufacturers' prices rose by 0.4 per cent in September, the biggest jump for 13 months. Manufacturers' price increases have been accelerating since the new year.

Keith Skeoch, chief economist at James Capel, said the prices data pointed to 'a modest upward drift in inflation rather than the surge the gilt market appears to be worrying about'. Andrew Cates at UBS warned that underlying inflation could breach the Chancellor's target range late in 1995.

Separate figures from the CSO showed a record pounds 632m rise in consumer borrowing in August, with a sharp rise in borrowing on bank credit cards and from finance houses. But analysts said this might reflect more borrowing on retailers' in-house schemes.

Trade Indemnity, the credit information group, also said that 5 per cent fewer businesses had gone to the wall in the third quarter than in the second, continuing the gradual decline that began at the beginning of 1992.

The Governor told Mr Clarke last month that an early rise in interest rates would mean that the authorities were less likely to push the authorities into a corner. He added that the Bank's agents around the country had found growing evidence that manufacturers were succeeding in raising component prices. This meant rates had to rise to nip incipient inflationary pressure in the bud.

'If the decision were delayed, they might need to return to the issue before the next monetary meeting', Mr George reportedly warned. The Chancellor noted that if the markets did not get the rise in rates they sought, 'the eventual rise in rates might need to be larger'.

Analysts are divided over whether rates will rise again this year, with the third-quarter national output figures and CBI industry survey later this month seen as crucial factors.

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