British economic recipe in doubt as interest rates rise

In a Western world looking for answers to prolonged recession, Britain's economic recipe is closely watched. But there is new concern here that the recipe's mix of ingredients - firm leadership, lower inflation and interest rates and government spending, a stable currency, smiles for business, frowns for unions - may be blending less well than hoped.

The 1 percent rise in bank interest rates in London Jan. 11 touched off a tremor of national alarm. It also started a new political argument, raised the possibility of a national election in June, and narrowed the options in the next national budget.

The interest rate rise reminded many observers how effective the government of Prime Minister Margaret Thatcher has been in persuading world money markets of its correctness so far - and showed that those same markets still need more reassurance than ever.

A measure of government concern was evident by the way its spokesmen raced to television and radio studios Jan. 11 and 12 to try to reassure voters, speculators, and other countries.

The need for their statements was plain. After falling for a number of months , bank interest rates began to rise again last Nov. 26. The Jan. 11 jump was the second in less than two months, and comes amid frequent predictions that inflation will begin to lift from a low point of 5 percent in mid-year to higher levels toward 1984.

Also, the pound has been close to its 1976 low point for some time now, and below the point which triggered world concern and the interventions of the International Monetary Fund in that year.

At this writing, the pound was continuing to lose ground against the dollar, though it was doing better against the German mark.

Three main reasons were cited: a mistaken belief that the just-ended Thatcher trip to the Falkland Islands was the tip-off for a spring election; Labour Party plans announced late last year to devalue the pound by as much as 30 percent if it comes to power (though shadow treasurer Peter Shore tried to pull back from the 30 percent figure Jan. 12); weakness in prices for North Sea (and all other) oil.

Thus the speed with which the chairman of the ruling Conservative Party, Cecil Parkinson, began to insist that the economy was essentially sound, that it was well-managed, that the budget deficit was small, that inflation and wage settlements were low.

Mr. Parkinson denied outright that an ''early'' election was likely. Political analysts took this to mean no spring election, though they agreed the chances of a summer one were now greater.