Chancellor puts fresh cut in interest rates on hold: Hopes revived at Treasury for reductions in tax by 1995

THE FINANCIAL markets will have to wait for at least a fortnight and possibly longer before the Chancellor delivers the expected second half percentage-point cut in bank base rates to 5 per cent.

Treasury officials said yesterday that Kenneth Clarke stuck to his view that the last cut in interest rates took full account of the Budget measures, even though they were tougher than had been expected by the markets.

The Treasury's monetary committee will want new evidence that the unexpectedly good inflation figures reported last month - which took the rate down to just 1.4 per cent, the lowest of all the main European economies - was not just a blip but a sustained downwards movement.

The two key sets of figures will be producer price inflation, due on 13 December, and retail price inflation, due on 15 December. Under the new regime imposed by the Central Statistical Office, the Treasury has far less advance notice of the numbers than before.

It also emerged that the Bank of England will have more flexibility over the timing of any rate cut than outsiders think. If a monetary committee meeting decides on an interest rate change, the Bank will normally have a whole month until the next meeting to move the rates.

The last interest rate cut was implemented on 23 November, even though the decision to cut had been taken some 10 days before. So even if an interest rate cut is sanctioned this month, the Bank could delay its implementation into the new year.

The Treasury's success in holding down public spending next year has revived hopes among Treasury ministers and officials that they may be able to cut taxes as early as 1995.

The Budget spending targets are to be regarded as ceilings and not necessarily as targets to be reached. They will be reviewed at next June's cabinet meeting on public spending, when a decision to aim for an undershoot could be made.

Ministerial hopes for squeezing spending even harder than forecast reflect the fact that the unified Budget brought spending in pounds 3.5bn below the pounds 254.9bn control total previously set for 1994/5. Ministers believe the surprising success of the strategy used in these negotiations can be repeated.