Outlook: Interest rates

THE BANK of England's quarterly inflation report was, for a change, a rather dull affair. The Bank largely agrees with the new Treasury forecasts for inflation and growth, widely depicted when they were announced by the Chancellor last week as hopelessly optimistic.

To the extent that the Bank is a little more pessimistic than the Chancellor on growth, the difference seems to be accounted for by the fact that the Bank models no change in interest rates into its forecasts, while the Treasury is assuming more cuts.

And while the Bank reckons the chances of a recession have doubled since the previous inflation report, it still puts the odds of one happening at just one in four. For the time being, then, the interest rate dilemma appears to have gone away. There seems no urgent need for further action and certainly another interest rate cut this side of Christmas now looks unlikely.

The same cannot be said of the Continent, where to describe the interest rate decision as a dilemma would seem a bit of an understatement. Inflation in France and Germany is now so much in abeyance that there is a danger of prices beginning to fall, as in Japan. Hence the clamour from Germany's new left-leaning government for immediate cuts in rates. Growth remains relatively healthy, certainly more so than here in Britain, but unemployment is much higher.

Unfortunately for Gerhard Schroder, the single currency is about to dawn, and with interest rates now set for Europe as a whole, rather than just Germany and France, they are already judged low enough, too low for some. In these circumstances, it is not surprising Mr Schroder is tempted to spend his way out of Germany's unemployment problems. Our own policy debate looks trifling by comparison with the many-headed monster of a challenge which is about to confront Europe's new single currency regime

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