City kept guessing over rate cut
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Your support makes all the difference.A tea-time meeting yesterday between Kenneth Clarke, Chancellor of the Exchequer, and Eddie George, Governor of the Bank of England, left the financial markets on tenterhooks over the possibility of a cut in base rates. This morning will present the Bank of England with its first opportunity to act on any decision taken by Mr Clarke at the meeting.
Minutes of the 3 July monthly meeting released yesterday confirmed that the Chancellor's and Governor's views about interest rate policy have diverged. If Mr Clarke has taken the plunge again, it will mark his most serious clash yet with Mr George.
Economists in the City were still divided yesterday about whether he would reduce base rates for the fifth time since December. Ian Shepherdson at HSBC Markets said: "These decisions are not predictable, but it is hard to see any real gain in doing it now rather than around party conference or Budget time."
This view was reinforced by mortgage lenders signalling a reluctance to reduce mortgage rates again. A spokesman for Halifax, the biggest lender, said: "Mortgage rates are at a 30-year low and I don't think they have much further to go."
On the other hand, Paul Mortimer-Lee, chief economist at Paribas, argued that this month presented Mr Clarke with his last window of opportunity. "Time is running out. The Chancellor would like another rate cut and here is one of the last chances he has."
The Bank of England has made plain its opposition to additional reductions in the cost of borrowing, and suggested that increases will soon be on the cards.
According to the minutes released yesterday, Mr George said the quarter- point June reduction to 5.75 per cent had increased the danger that the Government would not meet its inflation target.
He said the forward-looking indicators of inflation such as surveys, money and credit growth and the housing market were stronger than they had been in June. The Bank "would advise strongly against any further interest rate cut on the basis of current evidence".
Mr Clarke acknowledged that he and the Governor remained "slightly apart", although he agreed that interest rates should remain unchanged in July. He also agreed that the economy was gathering strength - but at not too rapid a rate.
"If growth did accelerate to the point where the inflation target was being put at risk, there would be sufficient time to act prudently," he argued.
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