Clarke set to clash with Bank

Mixed signals on the economy set the scene for a further clash between the Chancellor of the Exchequer and the Governor of the Bank of England at tomorrow's monetary meeting.

Manufacturing activity bounced back in January despite the recent strength of the pound, and a jump in cash in circulation signalled buoyant retail spending. On the other hand, more manufacturers were cutting prices than raising them last month, while Halifax reported a dip in house prices.

The City expects Kenneth Clarke to continue to resist Eddie George's advice to raise base rates. Their meeting comes a week ahead of the publication of the Bank's quarterly Inflation Report, which is likely to cause irritation in the Treasury by insisting on the longer-term inflationary dangers if the economy's growth is not checked by a tighter interest rate policy.

Mr Clarke has continued to insist that there is not much difference between his views and the Governor's but the four-month disagreement has led the markets to conclude that politics has overtaken policy. "We expect base rates to remain on hold until the other side of the election," Adam Cole at James Capel said.

Bank of England figures reported a jump of 0.8 per cent in the amount of cash in circulation in January, the biggest rise since Euro 96 boosted spending in June. The increase is likely to signal strong consumer spending during the month, even though the link between cash and consumer spending can be erratic.

There was evidence that consumer demand is boosting manufacturing in the survey of purchasing managers in industry last month. The Chartered Institute of Purchasing and Supply (Cips) reported a strong surge in activity combined with falling prices. New orders - both domestic and export - rose faster than the previous month, but the advance in home orders was much bigger.

Output and employment also increased more quickly, the latter showing its biggest jump in nearly two years. "The pace of manufacturing activity is picking up," Peter Thomson, director-general of Cips, said.

But at the same time more manufacturers cut prices than raised them, thanks in large part to the effect of the strong pound on import prices.

A separate measure yesterday that will allow the Chancellor to downplay the inflationary dangers was news of a small drop in house prices. The Halifax's house price index fell 0.6 per cent after an unusually big 1.1 per cent increase in December.

Halifax said last month's fall was probably an adjustment for the previous month. The annual rate of house price inflation slowed from 8.4 to 7.1 per cent.