View from City Road: The Chancellor's change of tone at the Treasury

Kenneth Clarke is a Midlands man. Birmingham and Nottingham are his entire background, and his overwhelming objective is that 'I should like to be remembered . . . as a Chancellor under whom the British businessman and woman and their workforce were able to earn a better living'.

This may be dismissed as mere rhetoric, but rhetoric matters in politics. It creates a mood and a character, subtly constraining subsequent decisions. The worry for the City will be that Mr Clarke may care more about cosseting commerce than curbing inflation.

Mr Clarke did, of course, throw a veil of consistency over policy by reiterating that there was no conflict between the pursuit of low inflation and his three objectives of growth, employment and living standards: 'Low inflation . . . is the only way to growth without tears.' Indeed, he tried to reassure the financial markets by committing himself, like the former Chancellor, to the 1-4 per cent target for inflation and to bringing inflation within the lower half of that range by the end of this Parliament.

Moreover, he has usefully opened up the debate about the independence of the Bank of England. John Major's remarks during the economic debate last week were sceptical: he thinks that what matters is the policy, not the institutions that pursue it.

But Mr Clarke said he had no intention of anticipating the debate, which may be taken as evidence of an open mind. If he is to become the fourth of five successive Tory Chancellors to believe that interest rates would be better determined by the Bank, investors in fixed interest rate securities need have little to fear from inflation.

In the short term, though, there can be a conflict between inflation and other objectives. There was certainly a conflict between 1979 and 1981 when the Government crucified Midlands manufacturing with an overvalued exchange rate, even though the strong pound cut import prices and inflation. So when Mr Clarke says he cares about 'the real economy', as he said last week, the gilts market may become twitchy about his instincts.

There is, of course, a policy mix that would enable him to meet his inflation objective and ensure that manufacturers thrive. That is to set interest rates to keep sterling relatively low, and to head off any inflationary threat by curbing public spending and raising taxes - preferably taxes on incomes rather than those that add to prices.

But there was no real hint here of Mr Clarke's intentions. In one paragraph of the speech, he said that 'we cannot rely on recovery alone to bring borrowing back towards balance' but in another he said: 'If I judge that further action is necessary (to curb the deficit), I shall not hesitate to take it.'

The Cabinet meets tomorrow to decide the target for public spending in 1994-5, and it would arguably have been difficult to anticipate its decisions. But the result is that the markets are likely to judge the new Chancellor warily. He has yet to serve up the beef.