Outlook: US may be alone in cutting rates

IT'S ALL VERY WELL calling for coordinated cuts in interest rates around the world, as Bill Clinton by demanding urgent action from the G7 appeared to yesterday, but what in practice are the chances of this happening?

The first point to be made is that these days it is not the politicians who make the choices, but independent central bankers, and they tend to be much more fixated on domestic economic concerns than global ones, rightly in many respects.

In Japan, short term interest rates are already so low they cannot realistically fall any further. In the UK, inflation is still rising, and although the balance of economic risk may have moved over the last couple of months from an inflationary to a recessionary one, a cut in UK rates would make very little difference on its own to the international economy.

As for Euroland, the pressures are all the other way; it needs a cut in rates like a hole in the head. In Germany and France, short term interest rates are already very low, at 3.3 per cent. In Italy, Spain and Ireland they are higher, but as the debate about who should converge towards whom rages on, it is perhaps the case that the two core single currency members should be moving up to join the others rather than the other way round. Certainly the pressure for convergence argues very strongly against a further cut in Germany and France.

So actually, if anyone is going to cut rates, it ought to be the United States. Beside the urgent economic need for such action, there is also a moral obligation on the US. The financial markets that have come to pose such a threat to the world economy are largely born and bred in America. Certainly they are one of its biggest industries and exports; the US economy is more closely aligned with and dependent on them than any other. If these very same financial markets are about to plunge us into recession, the onus is on the US to take the lead in bailing us out. If necessary, the US should be prepared to do this alone.