Clarke could get away with another rate cut

Kenneth Clarke has all the luck. The Bank of England may still have its reservations, but hardly anyone else is going to blame him if he cuts interest rates again over the next few months. Suddenly everything seems to conspire to let him do it. The Bundesbank, more led these days by the economic needs of France than its own domestic inflationary concerns, duly obliged yesterday with a rather larger than expected cut in the repo rate to 3 per cent, allowing France and Belgium to follow suit. On the other side of the Atlantic, fears of a rise in rates have receded and even here in Britain, what looked like mounting evidence of a pre-election boom seems rather to have been discredited by much of the data released over the last two days.

Even the public finances, the Achilles heel of most Chancellors since the war, seem to be on the mend judging by last week's borrowing figures. The backdrop for a further cut in domestic interest rates hasn't looked so good for months. Eddie George, Governor of the Bank of England, will warn the Chancellor strongly against it, but in his heart he knows that even the markets are not going to punish the Chancellor for doing it.

Longer term, of course, markets remain as sceptical as ever. Long bond yields of nearly 8 per cent tell their own story; it is that markets do not yet believe inflation is dead or that the public finances are restored to health. In part this is because they factor in a Labour Party win at the next election. But the prognosis isn't much better even in the unlikely event of the present Government scraping home. So the markets look both ways at once. While they seem capable of taking another rate cut in their stride, they already accept that policies of this sort are just storing up problems for the future.

But while bond and currency markets might worry about the future, the equity market has no such concerns. A new all time high was reached by the FT-SE 100 yesterday and it is hard to see what's going to prevent the onwards march up to the 4,000 mark in the present tapestry of circumstance. Though Hans Tietmeyer denies it, the Bundesbank has shown itself capable of breaking its own rules in cutting interest rates by such a margin. Money supply, which has for long determined policy at the Bundesbank, may be falling, but it is still above target range. If the rules can be broken once, they can be broken again. This may not be the last Bundesbank rate cut.