Time for a cut

The Bank of England ought to cut interest rates - currently 4.75% - by 0.25% when its monetary policy committee ends two days of deliberations tomorrow. The reason is simple: the dangers arising from a sharp slowdown in economic growth are now significantly greater than the risks associated with higher inflation. The UK economy has been on a roll for an unprecedented period and is still growing faster than most European countries. But it is not growing nearly as fast as the government needs in order to fulfil its budget targets and to finance the higher level of public spending to which it is committed. Demand for goods and services from industry and individuals has weakened for six consecutive quarters. The Bank was not too worried about this weakness when it was confined to goods, but in recent weeks it has spread to the service industries as well.

New figures published yesterday show that manufacturing output contracted by 1.9% in the three months to May. This makes it unlikely that output will meet the budget's target expansion of 1.75% this year. Although manufacturing is a comparatively small proportion of the economy these days - and may get even smaller now that China is aiming cheap cars at the European market - it remains vital to the export effort. The Treasury forecast of a 6.25% surge in exports this year looks unattainable now.

It has been something of a miracle that a prolonged consumer boom in the UK has not yet generated the kind of inflation that it used to do. When the history books are written this will probably be attributed to globalisation (in the form of cheap imports), strong monetary policy and immigration, which have enabled firms and individuals to use cheaper labour from eastern Europe as a buffer against wage increases. The benefits of this may be starting to come to an end. The consumer price index is now recording annual inflation of 1.9% compared with 1.1% earlier in the year, despite a sharp slowing down in housing prices. But this is still below the government's target of 2% inflation and, since the Bank allowed inflation to undershoot the 2% target for a long time, maybe it should be just as relaxed if it goes over the target for a temporary period. The long-term threat to inflation is not great (unless immigrants leave en masse), but the short-term threat to manufacturing and the service industries is considerable. The main debating point at the bank today and tomorrow ought to be not whether interest rates should be cut, but whether there may have to be a second cut fairly soon as well.