Business Outlook: Bank has fallen behind the curve

The Bank of England missed a trick. It was the only central bank to do what was expected of it yesterday, by not raising interest rates. On Wednesday Alan Greenspan made it plain as a pikestaff that the Fed will move to pre-empt inflation within the next month or two. Yesterday the Bundesbank, never able to pass up the chance to spring a surprise on the markets, made its widely anticipated move on rates at a completely unexpected time.

The start of an international upward trend in interest rates then? The picture is not that simple. US rates need to go up because the economy is growing too fast for inflation to remain tame. In his testimony on Wednesday Mr Greenspan made a compelling case for his view that the ever- tighter jobs market will inexorably put upward pressure on wages and inflation unless the Fed acts to cool demand.

However, the German economy is certainly not racing away at an unsustainable pace. Although there are some domestic inflationary signals, the rationale for yesterday's rate increase was external. The point was to underpin the German mark and to take German rates closer towards what will have to be the common European rate when the single currency starts. France and the Netherlands increased their rates as well yesterday for the same reasons. The other side of the coin is that Italy - when it gets through its governmental crisis - and Spain ought to be cutting their rates towards the common Euro denominator.

In Britain, the two forces appear to pull in opposite directions. The economy is still overheated - nothing dramatic, but almost all the experts think the question about a rate increase is when, not whether. In failing to act yesterday, the Bank fell a bit behind the curve, as folks in the markets like to put it. If its reluctance is understandable, it is also certainly not acting pre-emptively, as it perhaps should be.

It could be argued, on the other hand, that if the Government is seriously keeping open the option of joining the single currency at an early stage, UK rates ought to be reduced in order to converge on the EU level. But in fact the European dimension provides another reason for raising rates early and hurrying up the peak for this economic cycle. That would leave enough time for reductions in the UK later next year when the economy starts to slow convincingly. There is no way round the fact that Britain's economic cycle is out of sync with the Continent, but the best way to deal with that is to bring the consumer boom under control as fast as possible.