Rates should have been pushed up to a peak sooner than they were, in order to wrong-foot currency speculators, who were allowed a safe bet on the slow rise in rates that actually occurred. In the process the speculators bid up sterling to an excessive level, much to the detriment of UK exporters.
The slow decline in rates which eventually began last year was also too cautious, and it accentuated and prolonged the strength of sterling and increased the risk of a recession.
It now looks as if we may have escaped a hard landing, but that will have been more thanks to the strength of the US economy and the resilience of Asian economies than our own sound policies. Rates could and should have come down faster.
But this column thinks the decision not to cut rates any further this week was the right one. It would be too little and too late to prevent any further economic slowdown in the second half of the year, and worse still it would have signalled the almost certain bottom of the interest rate cycle, in turn allowing speculators to anticipate the start of an upturn in interest rates and take a fresh bet on a rising pound.
Sterling is still too strong for comfort and the weakness of the euro since it was launched in January has worsened the problems for exporters again, just as they had appeared to be easing over the second half of last year. Ideally sterling should have fallen about 10 per cent further, to allow the UK to make a smooth entry into the single European currency at an exchange rate which would give UK companies an attractive margin on sales into the Eurozone.
Arguably getting the exchange rate just right for entry is still the most important single objective of UK policy. But the right exchange rate is and will remain a moving target, and it would be wrong to push interest rates down too far now just to try and get this alignment right for 2002. In a perfect world the Government would use a combination of tax and interest rates to manage both domestic demand and the exchange rate.
In practice it has to be accepted that tax rises are a complete political no-no and interest rates are the only realistic tool for management of the UK economy.
Interest rates cannot manage both demand and the exchange rate, as Lord Lawson discovered in 1988-9, so policy is flawed. But the current level of interest rates just happens to be the best compromise available, and the longer the turning point in the interest rate cycle can be delayed the longer the compromise can be maintained and currency speculators kept guessing.
Another rate cut this week could also have accentuated the strength of the UK housing market, which is a notorious reservoir of future inflation and is showing some signs of overheating at the moment. The absence of a rate cut did not immediately damage corporate confidence or panic the stock market. UK savers are still getting better interest rates than their continental counterparts and the stock market as a whole is still offering a reasonable combination of income and growth for long-term investors not averse to a bit of risk. Steady as she goes is the right policy - for the next six months at least.