Ruling out recession

The Bank of England was absolutely right to lower interest rates by 0.25% to 5.75%, yesterday, a move that will lower mortgage interest charges across the board and reduce the cost of borrowing to industry. Even though Britain is not - yet - displaying the symptoms of a sharp, US-style economic slowdown, there is no point in taking risks. The prospect of recession in the biggest economy in the world is bound to have some impact on the rest of it and it is prudent for Europe, including the UK, to take proactive steps to stimulate its own economy just in case.

Yesterday's drop in rates was timely in other respects. Coming so soon after Tony Blair's promise to decide about the euro referendum in the first two years of the next parliament, it may help to keep the pound at the lower level needed for entry while also helping to meet another of Gordon Brown's five criteria for entry, economic convergence.

Bank base rates for prime customers in the UK are now only about 1.2% higher than in Europe. Longer term interest rates have already converged. Inflation is not a problem for the foreseeable future, since the underlying rate (2.0%) is already well under the target of 2.5% and could be even further below it later this year if inflation carries on falling as is likely. Sensibly, the Bank's monetary policy committee decided to drop rates now rather than next month when it might have been interpreted as an endorsement of Gordon Brown's coming budget.

The unexpectedly sharp slowdown in the US has made President Bush's plans for a $1.6 trillion tax cut less implausible than before, even though, on the Wall Street Journal's calculations, it would give the president and his wife a windfall 20 to 60 times higher than that of someone earning under $50,000 a year. Even some Republicans acknowledge that the plans will have to be made fairer to have any chance of passing through Congress unscathed.

Meanwhile, Gordon Brown, to his credit, will be reflating the economy mainly by making the poor less poor. Mr Brown now faces a hurdle of his own creation. Next month he will be the first chancellor to deliver a pre-electoral budget with an independent Bank of England in place designed to prevent irresponsible "giveaways". This means that Brown will err on the conservative side of generosity - and that there will probably be more interest rate cuts to come.