Two cheers for Clarke. The third can wait

Kenneth Clarke took many of the City's scribblers by surprise yesterday, but not its army of gamblers. The traders who bet on short sterling futures have long been pointing to a pre-election increase in base rates. None the less, it is easy to sympathise with those analysts who had predicted firmly that no Tory Chancellor would increase interest rates in the run-up to an election. It is an unprecedented and, on the face of it at least, brave decision.

The fact that Mr Clarke might have preferred not to do it, but was forced by the prospect of a public row with the Governor of the Bank of England, is irrelevant. He emerges with his reputation for prudence enhanced, living up to his repeatedly asserted belief that good economics is good politics.

So two cheers are due to the Chancellor. The third cheer will have to wait for another few weeks. For the question now is whether the Budget will be similarly prudent. Lord Howe, a Chancellor who could teach Mr Clarke a thing or two about austerity, yesterday warned his successor against the temptation of a tax give-away. He warned that a borrowing requirement of approaching pounds 30bn was too high in the fifth year of economic recovery. All the same, the unexpected increase in base rates clearly raises hopes that it was designed to carve out more leeway for tax cuts.

This hope rests on the calculation that it is the financial markets which are setting the limits on policy. Give them a quarter point on rates, and they will allow an extra billion or two in lower taxes, at least as long as there is a notional reduction in spending plans as well. This is probably correct. The City consensus before yesterday was that tax cuts would amount to perhaps pounds 2bn. A pounds 3bn giveaway instead would probably not frighten the horses.

However, those of us who are less short-termist must hope that the Chancellor is going to spring a surprise in the Budget, too. The public finances are in a mess, and borrowing has not fallen as far as it should - certainly not far enough for Britain to hope to qualify for the single currency. Inflation is low but higher than the European average. It will also shortly be on a rising trend once more, sharply so if the anecdotal evidence of London is anything to go by. The recovery in industry is weak but consumers are spending like fury, so the last thing the economy needs at this stage is lower taxes.

Mr Clarke's reputation will be all the higher in the long run if he keeps the "mini" in this boom with a display of magisterial caution in the Budget on 26 November. The scribblers on balance think he will restrain himself. The gamblers, on the other hand, are betting there will have to be two more increases in interest rates before next May. If they are right, it cannot be anything but bad news for the markets. A quarter-point rise in rates doesn't look like much, especially when it has no immediate impact on mortgage costs, but it is all the same a reversal of the cycle and therefore a portent of higher rates and inflation to come.

Getting into shape for Maastricht

A new method may shortly be added to the growing list of ways European Union member states are finding to massage their debt and public spending figures into a shape that allows them to squeeze through the eye of the Maastricht needle. According to Stephen Yorke of SBC Warburg, one of the neatest ways would be to sell gold reserves. For France, a swap of part of its $31.5bn gold reserves into dollar deposits would bring a welcome flow of interest that would help reduce the budget deficit.

France is already demanding that a one-off payment to the government from the state-owned France Telecom - ostensibly to cover pension liabilities - should be counted as an offset to next year's budget deficit. Even Germany is complaining about that one. Italy, Portugal and Spain all have the capacity to use gold sales to reduce their debt mountains to within the Maastricht limits.

This is no idle speculation. Belgium has already reduced its debt by 10 per cent by selling gold and been applauded by the European Monetary Institute for doing so. Others can be expected to follow. The distorting effect of such action is, however, not nearly as bad as the distortion already created by leaving unfunded pension liabilities out of the Maastricht criteria.

These represent the discounted cost of paying for future state pensions. The Commons social security committee is publishing a report today that calls for pension liabilities to be included in the Maastricht criteria. According to IMF figures, the present value of unfunded pension liabilities ranges from less than 10 per cent of GDP in Britain - which pays about the meanest pensions in Europe - to nearly 80 per cent in Italy and more than 100 per cent in France and Germany. A large pension liability could put heavy upward pressure on future deficits.

The effort being put by some countries into hiding financial reality in a variety of ways reinforces the view that monetary union is a good idea whose time needs quite a bit longer to come.

A new Sainsbury for a changed world

It has taken a long, long time for Sainsbury to lose its position as Britain's pre-eminent grocer. The question now is whether it can ever win it back. In the past couple of years, Sainsbury's supreme confidence, some might call it arrogance, has been rocked as it has slipped behind Tesco on a series of key measures. First it fell behind in UK market share, then stock market value. Later this year Tesco will emerge as the more profitable of the two. Sainsbury is still top dog on some counts. Its net margins are higher and sales per square foot are the envy of the sector. It is still a hugely successful business. But the others are catching up all the time.

David Sainsbury's problem is that the supermarket world has changed since his company was its undisputed king. It is harder to open new stores and there is more competition. Moreover, no rival is falling down on the job any longer. Sainsbury must therefore do more than return to its old self.

There are signs aplenty of change, but are they enough? It has brought forward its boardroom reshuffle, allowing Dino Adriano to get to grips with the supermarkets business. Last week's announcement of a Sainsbury's Bank is an innovation, though Tesco has already beaten it into financial services. Perhaps as significant is the company's own public admission that it must avoid arrogance and complacency, flaws that its rivals have so successfully exploited in the past.

Businesses like this have the turning circles of supertankers and true recovery will be measured in years, not months. But with one of the most trusted and respected brand names on the high street Sainsbury's management should fancy their chances.