View from City Road: The Chancellor is not trying hard enough

Base rates usually come down in half points or less and go up in ones. You get the bad news out of the way quickly and you ration the good news. The Chancellor has made the most of his interest-rate cut by letting the Bank of England decide the precise timing - and it is not Budget day, when the news would have been swamped by tax increases and would have looked too political.

The Chancellor is careful in his statement to say that the cut takes 'full account' of his budget. If this is true, it is dispiriting. Yesterday's reduction is arguably too little, too late. After all, the latest inflation figures showed the headline rate declining to 1.4 per cent and even the underlying rate (excluding the impact of mortgages) was down to 2.8 per cent.

This implies that the real interest rate - the actual rate minus the inflation rate by which the value of the lender's capital is eroded - is still 2.7 per cent, even after the new base rate cut. For a mortgage payer the real interest rate is still more than 5 per cent.

Almost all mortgage lenders are waiting before committing themselves to a cut, since their own savers are still fighting shy of low deposit rates. But they are unlikely to drop more than half a percentage point even with another half point off base rates. So real interest rates for most borrowers will stay above 4 per cent.

This is high for what is, after all, a sluggish recovery. Real interest rates are just 0.5 per cent in the US, 1.2 per cent in Japan and 1.7 per cent on average in the Group of Seven leading industrial countries. True, consumer spending in Britain grew by some 2.4 per cent over the year to the third quarter, but tax increases will knock what enthusiasm there is on the high street. And if they do not, then the tax increases will not be big enough.

Given Britain's twin problem of a large budget deficit and a large trade deficit, the Government needs tax increases to raise revenue and to keep consumer spending and imports under control. And it needs to cut interest rates to stimulate investment and export competitiveness. Moreover, this rebalancing of policy should be as draconian as the Chancellor feels he can sustain politically. The tougher the budget, the more durable the recovery. If a half percentage point is all we can expect, the omens are not good.