New policy indicator discussed

THE BANK of England is considering whether the Government should publish a single indicator of the tightness or looseness of monetary policy to help convince the public and the financial markets of the justification for interest rate changes.

Officials are meeting at the Bank tomorrow to discuss the possible new approach. It would involve combining the various determinants of the Government's policy stance into a single measure, weighted by their perceived effects on inflation.

These would probably include the exchange rate, the amount of money circulating in the economy, short and long-term interest rates and the shortfall between Government spending and tax revenue.

The Government could state the level of the monetary tightness indicator it believed consistent with its inflation targets. If the indicator showed policy was unnecessarily tight there would be prima facie justification for a rate cut.

This might allay City fears that rate changes are determined by the political whims of the Prime Minister and Chancellor rather than a clearly defined strategy.

Studies by economists at the London Business School suggest that the Chancellor will have to increase interest rates sharply again if he is serious about achieving his long-term objective of 2 per cent underlying inflation.