Bank makes a down payment

It came as no surprise to the City yesterday when the Bank of England announced that it was throwing its weight behind efforts to underpin the teetering global economy. Nor did the timing come as a shock following announcements the previous day by the Federal Reserve, the European Central Bank and the national banks of Switzerland, Sweden and Canada that they were making borrowing cheaper. Even Japan, where interest rates are already on the floor, managed to bring something to the party with a symbolic cut in its discount rate.

What did catch some traders unawares was the size of the reduction: a mere quarter-point, compared with more aggressive action by central banks elsewhere in the world. Industry, while prepared to welcome any reduction, however small, in its current plight, was miffed. Like Oliver Twist with an empty porridge bowl, it wanted more.

In all likelihood more will be coming, but not until the next scheduled meeting of the Bank's monetary policy committee on October 4. The key phrase in the statement issued to explain yesterday's decision was that it was "too early to make an informed judgment" about the impact on the UK economy of last week's terrorist attacks, even though the committee knows that it is bound to be negative,

The Bank's governor, Sir Eddie George, has been here before. In 1987 the then chancellor, Nigel Lawson, cut interest rates aggressively in response to the sharp fall in share prices, only to find later that the wealth effects from lower equity prices were much less than had been anticipated, and that cheaper borrowing simply added to a problem of excess demand.

Reading the minutes of recent MPC meetings, it is clear that some members were fearful - at least until last Tuesday - that Britain was on the cusp of a repeat of the late 1980s, with cheap money fuelling hefty increases in house prices and consumer debt.

Yesterday's meeting at the Bank was convened by the governor under the emergency powers granted to him under the act that gave the Bank operational independence. Gathering the nine members of the committee was not a problem but the exceptional circumstances meant that the staff economists could not give the MPC the full briefing on global and domestic conditions that normally takes place on the Friday before the decision is made on interest rates.

On past form, it is probable that some members of the committee - Sushil Wadhwani being the obvious candidate - were pressing for the Bank to come into line with the Fed and the ECB and cut rates by half a point. It is also likely that Sir Eddie was keen to secure a unanimous 9-0 vote in favour of a rate cut, and suggested a compromise in which there would be a quarter-point down payment with the rest to come in a fortnight if it is deemed necessary.

Some analysts said yesterday that the Bank had been deterred from a bigger cut in borrowing costs by the rise in inflation to 2.6%, just above the government's 2.5% target. But, given that inflation had been below the target for two and a half years and special factors were responsible for last month's breach of the target, this seems unlikely. These are not mechanistic decisions, but are based on what the outlook is up to two years ahead. The Bank simply needs more evidence from the British economy that there have been knock-on effects from the US on activity here.

If early reports from retailers warning of a marked drop in business since last Tuesday are anything to go by, such evidence will not be long in coming.