New governor, new policy, for our non-inflationary times

Bump... interest rates have dropped another notch. Low interest rates are traditionally regarded as a good thing, with the viewpoint of savers traditionally subordinate to that of mortgagees. And yesterday's decision, the first under Mervyn King's new management as governor of the Bank of England, was the right one.

Yet it still feels like a step in the dark. The economies of Britain, Europe, America and the world are all in various phases of transition, and it is unusually difficult to keep a clear picture of where we are heading.

Reasons to be gloomy: Gordon Brown's forecasts for economic growth, and therefore his plans for public spending, look unrealistic; cutting interest rates suggests the bank is worried about the outlook; and our 3.5 per cent base rate is still the highest among the main economic blocs: in Europe it is 2 per cent, in America 1 per cent, in Japan 0 per cent.

Reasons to be cheerful: the bottom has not fallen out of the UK property market yet, and may not do so as long as employment remains high; the risks of inflation seem to have subsided; and there is no reason to fear a deep recession.

The fundamental reason why it is so difficult to assess the prospects is that the main economies are still adjusting to a world where the dangers of stagnation seem more pressing than the dangers of inflation. After two decades - the 1970s and 1980s - when inflation seemed like a global forest fire that was never quite put out, all the evidence suggests that the rules of economic management have changed. Yesterday's rate cut is an acceptance that the risks of the rate of inflation being too low are as important as those of its being too high.

This is not to say that the world is threatened by deflation once again - at least, not in the sense that was known in the 1930s. The risk is much more of the kind of economic stasis that has paralysed Japan for the past 10 or more years.

Mr King himself may not have been behind yesterday's rate cut, but his succession to the top job at the bank may yet come to symbolise its shift in emphasis from fighting inflation to sustaining growth.