Clarke sounds cautious note on growth target

Kenneth Clarke, Chancellor of the Exchequer, said the economy was likely to grow by less than his 2.7 per cent forecast this year before picking up in 1996.

Mr Clarke told MPs that the fact that interest rates could be cut from a level of 6.75 per cent at this stage of the economic recovery showed that there had been a remarkable transformation in the British economy. Speaking before the Treasury Select Committee he also said he was more confident than ever that the Government would hit its inflation target.

However, the Chancellor sounded a note of caution about prospects for future rate cuts. These would depend on month- by-month evidence. "We've not spent our time achieving a low- inflation recovery in order to throw it away."

In an echo of Nigel Lawson's dismissal of "teenage scribblers" when he was Chancellor, Mr Clarke said he had learnt "not to take any notice of panic-stricken advice and day-to-day reactions". He added that now the public finances had been bought under control the Government had begun to reduce taxation again.

Mr Clarke said the main question at yesterday's meeting with Eddie George, Governor of the Bank of England, had been whether to cut rates by a quarter or a half. Mr George had recommended a quarter- point cut, which Mr Clarke had been minded to make anyway.

Yesterday's buoyant figures, especially a record number of new vacancies, and recent exchange rate weakness, had prompted caution. A falling pound was inflationary, Mr Clarke said. Mr George told the same committee last week that he still believed he had been right to recommend an increase in base rates last May, when the Chancellor turned down his advice. Mr Clarke said yesterday he still thought he was right too. "About that decision in May, Eddie and I quite amicably agree to differ."

Mr Clarke said the possibility of a disagreement had reinforced the credibility of the system. It was a proper framework for decision-making. "It was not a row, it was a finely balanced judgement. It is not too surprising that neither of us have changed our minds."

Asked whether he had had luck or shown judgement, the Chancellor said: "Some say it was lucky, some say canny. I still think it was the right decision."

Mr Clarke said growth was likely to be below the forecast of 2.75 per cent this year, although above 2 per cent. He stood by his forecast of 3 per cent growth next year. The strength of overseas markets and consumer confidence would play a role. "I do not accept that the only thing that will affect the economy is what we do with interest rates."

Mr Clarke added that interest rates were not being used to target a particular growth rate. Nor was it possible to read off from his forecast a prediction for interest rates. He admitted that the slowdown this year had been more marked than he expected.

Referring to the fall in unemployment last month, the 27th in a row, the Chancellor said labour reforms meant the sustainable unemployment rate was lower than it used to be.

The Chancellor said rapid growth in the money supply measures was puzzling at a time of such marked slow-down in the economy.