Leading Article: Europe shows us the way on interest rates

TO EVERYONE'S surprise, the normally ultra-cautious European Central Bank yesterday lopped a whole half-per cent off euro interest rates to take them down to 2.5 per cent. To no one's surprise, the Bank of England inched its rates down a quarter per cent to 5.25 per cent.

Why the difference in approach? Why, indeed, the difference in interest rates. Cynics say it all has to do with the departure of Germany's finance minister, Oskar Lafontaine. The cut he so aggressively sought was only possible when he was no longer in the post and the ECB could not be accused of giving in to political pressure.

The more sensible reason is probably that the European Bank, having decided that the risks of renewed recession in Europe were greater than the risks of resurgent inflation, decided a dramatic move was the only way to wrong foot the market and re-establish a secure position for the coming months. The Bank of England reached the same conclusion about relative risk but felt that anything more than a quarter per cent might over-excite the markets and fan the ever present flames of inflation.

It may be only a difference of tactic but it is also a difference of strategy. In the end the European Bank has decided that economic considerations of the wider world should outweigh the narrower remit of monetary targets. The monetary committee, more conscious of the odium of failure than of congratulations on courage, cannot raise its head that high. Good reason then for abandoning the practice of publishing minutes. It only induces constipation among the committee members. An even better reason for hastening to join the euro. Eddie George in his banking hall may see only the figures before him. Out there in the real world it makes no sense that British business has to pay double that of its European competitors.