View from City Road: Figures for a cut in interest rates

The dismal state of yesterday's factory output figures suggests that the Chancellor must be ruing his failure to cut interest rates well ahead of the Conservative Party conference, when he might have been exonerated from the charge of monetary jiggery-pokery. Thanks to the good offices of the Labour front bench, we now know that his own advice suggests real doubts in the Treasury about the sustainability of the manufacturing recovery.

Given the importance of manufacturing for this particular upturn, the figures are worrying. We cannot afford another consumer- led recovery, for the simple reason that it would rapidly suck in imports, worsen the trade balance, undermine sterling and cause the Chancellor to throw the expansion into reverse. So these figures mean that Kenneth Clarke should particularly help export and investment-led growth.

This does not mean running away from tax increases that might hit consumers, but it does mean that interest rate cuts should now come quickly. Even a 2 percentage point cut in bank base rate is unlikely to reignite consumer spending by much. Only part is likely to be passed on in mortgage rate cuts, and the debt overhang from the Eighties still means many will save rather than spend.

But interest rate cuts would help to encourage businesses to invest, and they would also further cut the cost of working capital. This is not to be underestimated when stockbuilding can play an important part in the early stages of a recovery. Any temporary fall of sterling, before German rates fall further next year, would also offset some of the gloom in Continental markets.