Outlook: Duisenberg goes from villain to hero

WIM DUISENBERG has transformed himself from villain to hero in one fell swoop. The European Central Bank's surprise decision to slash interest rates to 2.5 per cent yesterday will keep everybody happy - everybody, that is, apart from the voices of British industry and the Bank of England's Monetary Policy Committee. It is now the MPC which looks like the stick in the mud, despite having cut UK interest rates every month except one since October.

Borrowing costs in the UK remain high given that the economy, although landed safely and softly, is still pretty subdued. Not only are rates here more than twice those of Euroland, which admittedly is in the economic doldrums, they are also at similar levels to rates in the US, where the economy is belting along.

There was a flurry of concern last month in the financial markets that the Federal Reserve might have to think about tightening policy. In the event, it did not, and has since signalled pretty clearly that it will not until there are unambiguous signals that inflation is on the rise. The Fed has concluded that the old links from fast growth to low unemployment to wage inflation have broken, and it can afford to experiment with interest rates being lower than at the same stage of previous upturns.

Before the ECB move this could easily be portrayed as American exceptionalism. After all, it is in the US where new technology has made it most plausible to believe there is a new economy. The reluctance of the Europeans to cut rates across the Channel despite no inflation, sluggish economies and high unemployment made the Bank of England look activist by comparison.

And to be fair, it has been pretty activist. UK rates have fallen from 7.5 per cent at the start of October to 5.25 per cent. Long-term interest rates have fallen to their lowest since the late 1960s, a sign of the credibility of the Bank's policies. The falls seem to have done the trick - the most recent evidence points to a recovery. The first quarter of this year will probably turn out to have seen the weakest growth, with the economy flat. The landings don't get any softer than that.

Alas, the MPC will not get the credit for it now. Mr Duisenberg has made its members look over-cautious, no matter how buoyant the British economy turns out to be.