BRITISH Chancellor of the Exchequer Mr Kenneth Clarke is likely to reject any calls by Bank of England governor Mr Eddie George for higher interest rates at their monthly monetary meeting today, economists said yesterday.
At the last monetary meeting Mr George stated his preference for official rates to be raised to 6 per cent from 5.75 per cent.
"Mr Eddie George's case for higher rates is still there and I would expect him to make it again, but I wouldn't expect the Chancellor to give way to him at this stage," said Mr Robert Barrie, UK economist at BZW.
"Rates are unlikely to rise before the election," he said.
The base rate has been at 5.75 per cent since it was cut by a 0.25 percentage point in early June, the fourth cut in rates since last December.
Analysts said among the factors in support of a continued hold on interest rates were mixed signals from inflationary indicators with few signs of pressure on prices coupled with the recent appreciation of sterling.
Third quarter GDP data, published last week, showed the economy had grown 0.8 per cent compared with 0.5 per cent in the previous quarter, to give year-on-year growth at 2.3 per cent. However retail sales fell 0.3 per cent in September compared with a rise of 0.9 per cent in August.
"Clearly from the latest GDP figures the economy is now growing," said Mr Barrie. "But the behaviour of the RPI [retail price index] in recent months has been slightly disappointing."
The RPI, minus mortgages, was at 2.9 per cent year-on-year for September compared with 2.8 per cent in August. The government has targeted RPI to be at 2.5 per cent by the end of this parliament.
Analysts said that provided the current strength of sterling continued, interest rates could remain at present levels.
"Sterling is the one thing which has worked in the Chancellor's favour because it means the overall monetary conditions are tighter," said Mr Michael Dicks, economist at Lehman Brothers.
But he said the exchange rate worked mainly to slow growth in the corporate sector rather than to head off domestic demand in terms of consumption, where higher interest rates would be more appropriate.
"Although the argument is there that a typically stronger exchange rate means less need to put up rates . . . the truth is that it is not the optimum way out of the problem and it is certainly not enough at this stage when you've got unit wage costs and manufacturing accelerating," said Mr Dicks.
He said the Bank of England was right to be calling for higher interest rates but no increase was likely until after the election, due by next May, when they would be raised aggressively.
Mr Michael Saunders, UK economist at Salomon Brothers, said the current pick-up in the economy made a reasonable case for June's quarter-point cut to be reversed, but little would be lost by leaving rates unchanged until a bigger move was needed.
"We suspect that base rates will stay on hold in the next few months, rising by 0.5 to 1 percentage point in 1997 as faster growth pushes up lead price guides," said Mr Saunders.
But some analysts said while Mr Clarke would prefer not to raise interest rates, he would be prepared to tighten rates if the circumstances required such a move.
"It is better for the Chancellor to be seen to take action than to run the risk of being accused of neglect," said Mr Richard Jeffrey, strategist at Charterhouse Tilney.
A 0.25 per cent rise in base rates now would be an appropriate precautionary signal and could help reduce the extent to which rates would have to rise later in 1997, said Mr Jeffrey.
"The political signal would also be positive, since it would help focus attention both on the recent strengthening in economic activity and on the government's determination not to place in jeopardy its success in reducing inflation," he said.
