Why the Governor is playing Father Christmas

MARKETS do not like surprises - even nice ones like the cut in interest rates by twice the amount that had been anticipated. If the Bank of England feels it had to cut rates by a full half a percentage point, when they were already at the lowest level for 30 years, things must be much worse than the authorities have been letting on. Though the figures still suggest that the British economy is holding up well - better indeed than any of the world's other developed economies - bad times must be around the corner.

But if that is the pessimistic view there is also a more positive message which is, if anything, more credible. It is that the Bank of England does not like the gap between American interest rates and those in this country to widen too much, because when our rates are significantly higher than those in New York it brings too much hot money into this country and pushes up the sterling exchange rate against the dollar. When sterling is over-valued it causes all sorts of unpleasant side effects for exporters and tends to depress the economy generally. So, with the Americans having cut their rates by half a point on Tuesday, we really had no choice but to follow today.

The Bank's motivation probably had a bit of both strands. It tries to look two years ahead, and although the economy is still doing fine it may well have felt a bit nervous at the signs in surveys published during the last few days which suggest confidence in the services sector is ebbing fast, that house prices are going off the boil and that the steam is beginning to go out of the retail sales boom. All those are signs of confidence, or a lack of it. The Bank of England is only too well aware from previous recessions that when confidence falls away, it can very easily take the economy with it.

So today's cut is designed crudely, but probably effectively, to give a boost to all us credit card users. What the Bank has done is given a timely fillip to spending just in time for Christmas. For many stores the six weeks just beginning account for a quarter of their annual sales. If the goods fly off the shelves it sets up the economy for the next six months. But if shoppers are scared and stay at home, the stores don't make their money, the distress sales start and the gloom becomes contagious and very hard to lift.

A merry and prosperous Christmas for all is the Bank's intention. Its Governor, Sir Edward George, so often characterised as Scrooge for spoiling the party, is this time playing the role of Father Christmas.