FEAR OF FINANCE

The latest and least expected cut in interest rates this week is good news for business and for borrowers, bad for savers and for anyone who might have been banking on big tax cuts in the autumn. Regular readers will remember that this column takes the view that in political, if not in economic terms, tax cuts and interest rate cuts are alternatives. The Chancellor can afford one but not both.

In recent weeks Kenneth Clarke has gone through the usual pre-Budget routine of playing down the prospects for tax cuts and, unlike most Chancellors, this time he sounds as if he means it. Tax cuts would be dangerous when tax revenues are falling below expectations because of a sluggish economy and the public sector borrowing requirement is overshooting the target set last year. Cuts could only be justified if he could find still more big "savings" in public spending and these would be unpopular with the voters, whatever the Redwood tendency might think.

Tax cuts are a blunt instrument that can be adjusted only once a year. Interest rates are more precise and can be fine-tuned. They cost the Treasury nothing; in fact they reduce the cost of funding the PSBR, they can give consumer and business confidence a quick sharpener and the bill in terms of a possible rise in the inflation rate only starts to come in 18 months later.

The latest cut also demonstrates once again that the partnership between the Chancellor and Eddie George, the Bank of England Governor, is an unequal one. Whatever the Governor may have thought will not emerge for six weeks and it is increasingly clear his role is like Cassandra's. He will have the dubious satisfaction of saying, "I told you so," if things go wrong.

The cut in rates has given those mortgage lenders such as Halifax, whose mortgage rate was looking uncompetitive, the chance to bring rates below 7 per cent without looking tactically slow.

Bradford & Bingley has pushed its own rate down to 6.74 per cent, but Nationwide, the leading society still committed to remaining a mutual, is already at 6.74 per cent and it will be interesting to see if chief executive Brian Davis is able and willing to cut his own rate and keep up the competitive pressure on those societies like Halifax which will have to start generating profits for their shareholders.

The cut may well force societies to reduce rates to savers and gives them the opportunity to put more pressure on carpet-baggers, who must keep substantial balances in their accounts if they hope to profit from any future windfalls.

It will also increase the attractions of investments, like GAN's Second Guaranteed Income PEP, which opened yesterday and offers up to 10 per cent a year tax-free income and guaranteed return of capital after six years (01279-828205), and the Exeter High Income PEP (0321-393837), which uses a split level trust to concentrate the income on offer up to 11.2 per cent tax-free.

It will attract investors to share-based investments like Schroders Emerging Countries Investment Trust, launched next month, and S&P's new no-load (initial charge) Growth Fund, which it claims will outperform index tracker funds.

The further cut in interest rates may also cause some heart-searching at Tesco, which has just launched a banking service to shoppers based on paying 5 per cent interest on balances and charging 9 per cent on borrowings. They were presumably banking on stable interest rates to get the project off the ground.