Chancellor wants even higher interest rates, Bank says

The Governor of the Bank of England admitted yesterday that the Chancellor of the Exchequer thinks interest rates have not risen far enough. He defended the Bank against accusations that it had not pushed rates higher as well as counter-charges that last month's rate rise was unnecessary. Diane Coyle, Economics Editor, reports on the monetary policy balancing act.

Eddie George, Governor of the Bank of England, and other members of the Monetary Policy Committee (MPC) faced a grilling from MPs yesterday over whether they had ignored exports and growth when setting interest rates.

Yet, quizzed over the Treasury's forecast for the inflation outlook over the next year, published in this week's Green Budget, Mr George highlighted the Chancellor's more pessimistic view. Asked whether he thought the forecast meant Gordon Brown foresaw further interest rate rises, he replied: "I think it clearly does."

The Governor also agreed that the new Government had inherited too loose an interest rate policy. "I think that was transparent in the advice we gave the new Chancellor," he said.

But members of the MPC refused to be drawn on whether they would increase the cost of borrowing again if growth turned out to be higher than they expected. Much of the Treasury Committee's session on the Bank's recent Inflation Report focussed on whether the MPC had paid enough attention to the weakness of industry as a result of the strong pound.

Mr George defended the Bank's record. "Subject to the inflation target we have to take account of other objectives of government policy, one of which is not to screw down the export sector unnecessarily," he said.

He said the strength of sterling explained the tactical decision to move interest rates in steps of only a quarter point at a time, even though the MPC had thought that further increases would probably be necessary.