Base rate - massive cut.

The Bank of England cut the base rate this morning, from4.5% to only 3%. This is a savage cut compared with earlier cuts of one quarter percent at regular intervals, and similarly with rises.

The implication seems to be, assuming that they have not been leant on in some way by Mr. G. Brown, that they feel that inflation is no longer a major concern, (-it could be if sterling depreciates and import prices rise significantly as a consequence) and that the recession, sorry BBC - "downturn", looks more frightening than we thought.

What can be expected to happen? Some businesses for which it is not too late may in fact survive, and their employees have income to spend. It could work.

In addition the government borrowing costs will have been pushed a little lower, although they are now borrowing so much that there could be upward pressures on the rate. (Unless the Gulf petroleum states are feeling generous and the government runs there like naughty Barclays Bank!)

There will be little incentive to save. With interest rates even before tax below the present level of inflation, there is little incentive to save, and our savings rate is already very poor. The logical thing is to spend by borrowing, if you can do it, as your debt will reduce in real terms through inflation greater than the interest rate. But a large part of the population have had a poor experience of borrowing over the past 5 years.

The conclusion among experts seems to be that if it is managed and not Greenspan-like, it could help to reduce some of the pain of recession. But it cannot remove all pain, because some adjustments need to be made within the economy, and as Japan discovered in the last decade it may merely postpone problems to return again and again.