View from City Road: Small rate downpayment with more to come

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The Independent Online
Some sceptics in the markets yesterday thought that the Bank of England had timed its footling quarter percentage point rate cut to upstage the publicity surrounding the death of Stephen Milligan, which proves only that there is no conspiracy too far-fetched for the credulous. It does, however, illustrate how the wrong people take Britain's interest rate decisions. The Chancellor decides whether rates should change, and the Bank chooses the time.

Surely the Bank should make the economically important decisions about whether rates should change, while the Chancellor decides the timing.

A quarter point is little more than symbolic. It confounds some of the more gloomy comment about the recent quarter-point rise in US interest rates removing the room for British rate cuts, and that may buoy confidence, not least in the stock market. But the move itself makes little difference to the real world: not one mortgage lender proposes to shave interest rates as a consequence.

The likelihood is that the mini- cut - rates come down in penny packets and go up in leaps - is only a downpayment before another two or three quarter-point cuts. Those tax increases will hit consumer spending with increasing force from April, with a tranche of airport duty and insurance premium duty in the autumn. Rates need to fall below 5 per cent before year-end.

On the external front, sterling may well edge upwards. If this sounds odd when US interest rates are rising and pulling up the dollar, remember that our important trading relationships are with the Continent.

With the mark sinking as the Bundesbank cuts rates, the pound may rise on its trade-weighted exchange rate index.

Since the Chancellor wants to encourage an export-led recovery, sterling strength could provide a second trigger for another rate cut.

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