How fortunate, too, that that earlier forecast of inflation teetered on the brink of the target of 2.5 per cent or less.Yet it is possible to take a more straightforward view of the decision. A further overruling at the hands of Mr Clarke would have done nothing for his credibility.
And yet much the same could be said of the Chancellor. If he had ridden roughshod over the Governor in pressing for a cut in rates, critics would have had a field day. The charge would be that the new monetary arrangements had comprehensively broken down and we were back to interest rates set solely according to the dials of the political and electoral imperatives of the day.The need for a compromise was thus pressing from both sides.

Despite his protestations to the contrary, Mr George was left in a highly vulnerable position. Such no doubt unworthy thoughts are inevitable after the clash between Kenneth Clarke and Eddie George over the summer. While that had the fortunate side-effect of turning the drab pursuit of economic policy by the dessicated number-crunchers of the Treasury and the Bank into a spectator sport, the players were not so happy. The suspicion is that the Chancellor wanted more and the Governor wanted less; that a quarter point down was the deal cooked up before the meeting.

We were saved the old chestnut about singing from the same hymnbook, but the intention was clear: a state of harmony has been restored to the previously discordant relationship between the Chancellor and the Governor of the Bank of England Most of us are left unconvinced. Kenneth Clarke and Eddie George pulled out all the stops to present a united front on the decision to cut rates by a quarter point. New information since the November report pointed to an improved outlook for inflation, such that the Bank now thought the Government would probably hit its inflation target.Today’s figures for inflation will provide an early test of the credibility of the decision.. In November, the Bank still cautioned that inflation would be just over the Government’s target of 2.5 per cent or less in two years.”Our view has changed,” Mr George told a press conference after the decision to cut rates. Still more worrying, the expansion of the non-oil economy in the third quarter of 1995 slowed still further to just 0.3 per cent, well under half the underlying rate of growth the Treasury now thinks the economy can sustain.Back in May, the Bank’s central forecast for inflation targeted by the Government – retail prices excluding mortgage interest payments – was that it would peak at almost 4 per cent early next year and that it would be at 3 per cent at the begining of 1997. Apparently as much to the surprise of his own Treasury officials as to the Bank, Mr Clarke unexpectedly overrode Mr George’s recommendations that a further jump in rates was needed to offset the inflationary effects of the 5 per cent fall in the pound in the first half of the year.The Chancellor undoubtedly emerged the winner in this first trial of strength under the new monetary arrangements that had given the Bank more influence in the shaping of interest rate policy.

But he came out on top principally because the economic indicators went his way rather than the Governor’s.Growth, which had initially been thought to be running at 0.8 per cent in the first quarter of the year, equivalent to an annual rate above trend, was revised down to 0.6 per cent. The day after the Bank of England lifted rates last December from 5.75 to 6.25 per cent, the City consensus was that rates had much further to go in 1995 – to 8 per cent by June and almost 9 per cent by December. With the economy growing at 4 per cent in 1994 and Britain’s sorry track record in curbing inflation, a sustained tightening in monetary policy seemed inevitable.In the event, rates peaked after one further rise to 6.75 per cent in February. Yesterday’s cut in rates acknowledged the reality that growth has slowed much more than had been expected – and that inflation has not accelerated out of control as had widely been feared.In between came the epic struggle between Mr George and Mr Clarke over the call by the Governor of the Bank of England for a further hike in rates in May. The extended stand- off over the summer between the Bank’s call for higher rates and the Chancellor’s refusal to sanction it had threatened to bring the new system into disrepute.Mr Bell said that the cut had more credibility because Mr George had recommended it. However, Mr Bootle voiced his suspicion that “there was probably a negotiation before the meeting with Mr George opposed to any cut and Clarke wanting a half per cent, with the quarter point cut emerging as a compromise”.Despite this mixed reception to the cut in rates, one thing is clear: it marks an extraordinary turnaround in expectations. There was an equally sharp clash of views over whether the united front presented by Mr Clarke and Eddie George over the decision had restored the credibility of the present monetary arrangements in which the Bank has been given more influence in the shaping of interest rate policy.

“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. 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.