Britain Grapples With Raising Interest Rates

Kenneth Clarke, the Cabinet minister in charge of Britain's finances, will decide when he returns from vacation whether to hike interest rates in coming months.

For now, he's getting conflicting advice.

The Paris-based Organization for Economic Cooperation and Development issued a report last Tuesday stating that Britain's economy is growing fast and on course for low inflation.

But Eddie George, the Bank of England's governor, says inflation is in danger of getting out of hand; he has berated Chancellor Clarke four times for rejecting advice to raise interest rates, which currently stand at 7.75 percent.

The day after the report came out, one of Mr. George's officials repeated the bank's view that the government could miss its target of holding underlying inflation to 2.5 percent by 1997, unless interest rates go up soon.

But Treasury Minister Angela Knight, a Clarke supporter, says the chancellor won't give in.

Treasury sources say Clarke was impressed by the OECD analysis, which says inflation would remain moderate, and forecasts that unemployment would keep falling from its rate of 9 percent to about 7.5 percent by the end of next year.

But economists and other experts differ about prospects.

Lord Alexander, chairman of National Westminster Bank, claims "inflation is steadily building up." He wants the government to be "ready to raise interest rates again."

But Richard Jeffrey, chief economist of the Charterhouse banking group, says: "Follow [George's] advice, and a recession could result." He contends that a slack housing market would deflate further if interest rates went up.

The interest-rate-policy debate has brought to the open tensions between George and Clarke.

In the past year, minutes of their meetings have been published - a change Clarke ordered in 1994. The minutes reveal that most of the time George pressed for a tight money policy, with inflationary fears at the top of his calculations.

But Clarke serves an unpopular government and knows the growth referred to in the OECD report has yet to be translated into a "feel-good factor" among the people.

The government has suffered embarrassing by-election defeats, and its House of Commons majority is now only nine seats.

Analyst Will Hutton says the Bank of England's credibility has been "badly dented." George, he claims, has "failed to take account of the current political situation. Instead of concentrating narrowly on interest rates, the bank should take more account of the broader economy."

Jeffrey agrees: "Is the bank really suggesting that we risk another recession just because we might overshoot the inflation target by 0.25 percent? I find that staggering."

But economist Tim Congdon says Clarke is right to resist calls for higher interest rates.

Just as Clarke is getting conflicting advice on interest charges, he finds himself in the middle over tax rates. He is under heavy pressure from conservative Parliament members, anxious about upcoming election prospects, to order tax cuts in his November budget.

But the OECD report warns about tax policy, suggesting that cuts could trigger inflation.

London financial circles are monitoring the Clarke-George tussle, which extends beyond fiscal policy. The governor wants to have the Bank of England made independent of government, like the United States Federal Reserve. Clarke opposes the idea.

The Financial Times asks whether the governor's resilience "is attributable to pride or simple prudence."

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