Leading Article: Ken and Eddie's big day

Looking around Britain, it may be hard to fathom the reason for putting up interest rates. City analysts may agree that we need another monetary purgative, but most of us already feel weakened by the economic medicine that we have stomached over the past few years. House prices are static or falling, retail sales are poor, and official figures for manufacturing production suggest drift. To many people facing job insecurity and increased tax bills, not to mention the continuing shadow of negative equity, these days feel more like a famine than a feast. So the Chancellor and the Governor of the Bank of England can hardly expect a VE weekend cheer if they agree, as expected, to raise rates for the fourth time since September.

But the pair of them should not be put off. The Governor, Eddie George, can indeed make a reasonable economic case for a rise, designed to save Britain from rolling towards the downward curve of the country's typical boom-bust cycle. Mr George can justifiably point to strong economic growth, still running ahead of long-term trends, to the rising cost of imports caused by large falls in the value of the pound and to the emergence of bottlenecks in manufacturing industry. These are all indicators of latent inflationary pressures. Timely action now will be much less painful than the measures that will be necessary if inflation is allowed to gain momentum.

The counter-argument is that Mr George, scarred by the economic mismanagement of the late Eighties, is over-reacting; that the signs of an inflationary push are too weak to cause anxiety and that the economy may be unnecessarily bruised by action on interest rates now. This is a matter of judgement; ours says that the potential benefits of higher rates, on balance, outweigh the likely costs.

What ought to make us more suspicious is the hand being played by Kenneth Clarke. Despite the political flak he can expect to face if rates rise, the Chancellor is unlikely to feel too perturbed if a rise is pressed upon him by an anxious Governor. Following yesterday's Tory losses in the local elections, this might look like a double whammy. But the politics of winning the next general election mean that the Chancellor's political interests now fit neatly with the Governor's economic motivation in keeping monetary policy tight.

The key to his thinking lies in income tax cuts. Mr Clarke is having trouble identifying the cash and the case for the substantial reductions in taxes that his party is banking on. So gathering the funds might require more public borrowing than is strictly prudent and a laxer fiscal policy than the already warm temperature of the economy warrants. Such a slackening in fiscal policy would require substantially higher interest rates than would otherwise be needed.

In short, the Governor and the Chancellor should find it easy to agree on a rate rise, albeit for different reasons. That's fine for now, because an increase is warranted. But, in future, we should watch that Steady Eddie does not get overcautious, allowing Canny Ken to play fast and loose with taxes and spending.