Rate cuts- (16.2.03)

Why did the Bank of England cut interest rates exactly? Perhaps because they hadn't done anything for a while they felt that they may get less media attention unless they did something that most economic commentators would be suprised at. It certainly can't have been because they were paying attention to their inflation target, which will now almost certainly remain above 2.5% for the rest of this year. A fear of a housing price crash and a knock on effect on consumer spending hitting economic growth is the real, and perhaps valid reason for the cut. However, this isn't a reason for a cut which is within the Bank of England's remit.

The European Central Bank has a 2% inflation ceiling and there has been recent debate whether this is the cause of the stagnant European economy and therefore should be relaxed. The debate is not suprisingly pslit between monetarists who see it as a clamp on excess government welfare spending and other who want to see flexibility across the economic cycle. Unlike the UK there is more credibility to the argument that growth problems are structural rather than temporary, so changing the target would have little effect (although 2% being too low is another matter).