Difficult choices for the Chancellor

Bank Calls for End to "Volatile Cycle"

A Barclays Bank report said tightening monetary policy by raising interest rates provided the greatest chance of avoiding such a pattern over the next few years.

Although Labour inherited a "favourable" set of economic circumstances, "the situation is not tension-free", it added.

"If the economy continues to expand strongly, inflation is likely to rise above target during 1998," warned Barclays in its second quarterly review of 1997.

"With UK inflationary pressures in danger of building, the trend in interest rates over the coming year will be upward," it continued.

If the Bank of England were to be pro-active in damping demand, Barclays reckoned rates would have to "rise substantially further" over the coming year, from the current 6.25% to even as high as 8% in a year's time.

"With a bit of luck, the slowing in economic growth that follows will be a soft landing, limited to a period of below-trend growth rather than a damaging recession involving all sectors of the economy," said Barclays.

Exporters, in particular, have called for the Chancellor to raise taxes to curb spending as they feared further rises in interest rates would push the pound even higher.