Clarke admits inflation may go above 4%

'More room' for base rate changes

Kenneth Clarke's counter-inflation policy was under Opposition attack last night after he acknowledged to backbench Tory MPs that the rate could go higher than the promised range of 1 to 4 per cent.

In a briefing paper for backbenchers, the Chancellor reinforced the view that he had given himself limited elbow-room on base rate increases in his annual Mansion House speech last night. In the speech, he said the Government's aim was still to get inflation to a level of 2.5 per cent or less before the election, but admitted that events might drive it above that rate.

However, in a leaked briefing document, prepared for Tory MPs, Mr Clarke went further by saying that inflation would be within the range of 1 to 4 per cent "most of the time".

Stressing the Government's determination to continue delivering low inflation Mr Clarke said in the speech that the target had delivered the country's best inflation performance since the 1960s, and it would be extended beyond the end of the present parliament. ''If I believe that the economic circumstances justify it, I will not hesitate to put interest rates up again,'' he said.

And declaring for the first time that the 2.5 per cent objective would be made permanent, he challenged Gordon Brown, the shadow Chancellor, to match his pledge by committing Labour to a specific post-election inflation target.

But Labour seized on the briefing paper to argue that Mr Clarke had for the first time positioned himself closer to the Bank of England's forecast on inflation.

The briefing paper said: "Events outside our control - for example sharp changes in trade prices - could temporarily take us away from objective. But setting interest rates to achieve inflation objectives around two years ahead should mean that inflation will be between 1 and 4 per cent most of the time." Although the wording closely followed the speech itself the reference to "most of the time" was not included in the speech.

Alluding in his speech to the widespread speculation that he and Eddie George, the Governor of the Bank of England, had disagreed at their meeting on 5 May, the day after the local elections, over whether or not base rates should rise, the Chancellor said his interest rate decision had been finely balanced but was not politically motivated. He said discussions over monetary policy with the Governor were ''occasionally combative''.

Mr Clarke maintained that there would be no politically motivated dash for growth through tax cuts and said: ''I have not yet found the money tree from which I can pick pounds 10 notes. Until that day, if I spend, I tax.'' The Government's aim continued to be to bring the budget towards balance over the medium term.

Mr Clarke said stable public finances were an essential element in restoring a sense of security to middle England and issued a blunt warning to his Cabinet colleagues that they could not expect tax cuts unless they were prepared to reduce spending. ''The British people do not want to see another boom that goes bust,'' he said.

Mr Brown said last night: "There is now confusion over the Government's real inflation objective which the Chancellor is going to have to clarify. In public he is saying that it is 2.5 percent by the end of the Parliament, within a range of 1 to 4per cent. In private he's admitting it might go above 4 per cent between now and the end of the Parliament."

And Malcolm Bruce, the Liberal Democrats' Treasury spokesman said: "First he tells us that the new target is to keep inflation down below 2.5 percent for ever ... then at the end of his speech he sneaks in the observation that inflation is pretty difficult to control ... It doesn't take much imagination to see that a Chancellor who has already ignored the Bank of England's advice that rates have to be raised to keep inflation below 2.5 per cent is going to use this get out clause to keep interest rates down before the election while stoking up the economy with tax cuts."

Business, page 17