KENNETH Clarke is dragging his sparring partner, Eddie George, away from their normal meeting place at the Treasury to his political home in Nottingham in England's industrial heartland for what could be the last performance of the Ken and Eddie show. The Chancellor likes to cast himself in the role of champion of manufacturing, which has come under pressure from the strength of sterling, and he may think he can make a point or two to the Governor of the Bank of England in their running battle over interest rates in a setting he knows better than anyone. Or perhaps it was the only way he could fit the meeting into a busy election schedule: even Mr Clarke's large majority could come under pressure in the current climate. With the election just three weeks away nobody is expecting the Chancellor to throw in the towel and suddenly accede to Mr George's oft-repeated demands for a tighter monetary

policy.

This week sterling has risen above its old exchange rate mechanism floor against the German mark and it has continued to rise since. It has now retrieved more than 20% of its losses against the mark. Undoubtedly this makes life difficult for Britain's exporters though the first signs of economic recovery on the Continent should help to counteract this. Domestic demand for goods remains strong. The latest manufacturing figures show that factory output rose by 0.6% in the three months to February. Compared with the booming services sector this is not startling, but it is healthy enough if it can be sustained. The economy is skewed towards consumer demand, and there are signs of a build-up of inflationary pressure in services. The quickest way to deal with this situation is to increase rates. That is what the City is expecting: indeed there is a distinct possibility that the process could begin

at the May 7 monetary meeting just days after the election.

Consumer demand is now being fuelled by the tax cuts arising from November's Budget at a time too when building society flotations could also boost spending. Mr Clarke had a point to prove on tax before the election, but the cuts were not the best medicine for the economy. Ideally the new Government would adopt a tighter fiscal stance after the election, but with the two main parties sparring with one another to see which can develop the best tax-cutting credentials, the chances of taxes being increased to check the growth in consumer demand are not great. In such an event monetary policy will have to play the main part in taking the heat out of the economy. If the inflation target, to which both parties are committed, is to be realised, action cannot long be delayed.