AT NOON TODAY the Bank of England will make its monthly statement on interest rates. The chances are that the Bank will announce its first reduction in base rates since July 2003, initiating a process of steady monetary easing that should gradually produce a significant acceleration in Britain’s economic growth, ending the present period of relatively sluggish performance. If the Bank’s Monetary Policy Committee does not decide on a rate cut this morning, it is almost certain to do so at its next meeting on August 4.

Assuming that the Bank does cut interest rates, whether today or in August, the significance of this event will go well beyond the direct economic impact of a quarter-point off mortgage rates. An easing decision will mean that today’s 4.75 per cent base rate marks the peak of the present interest rate cycle. This will be the lowest such peak since 1953. In fact, this peak will be lower than the interest-rate troughs of all the economic cycles between 1964 and 2001.

In other words, a reduction in interest rates from the present level will confirm that the British economy is now operating in a totally different financial environment from anything seen in the past 50 years.

It will also demonstrate that the Bank of England takes very seriously its broad obligation to manage economic growth and employment — unlike the European Central Bank, which continues to behave like a rabbit caught in headlights and will today declare that it has decided to do nothing, for the 25th consecutive month.

The change in the ground rules of Britain’s monetary management and performance should, in turn, help to dispel some of the anxieties about unsustainable levels of house prices and consumer borrowing, which have undermined consumer confidence in Britain. The prophets of doom who still predict a collapse in housing and consumption, do so because they assume that economic relationships of the past 50 years will reassert themselves — for example, that the ratio between house prices and average earnings will eventually revert to its long-term average. But such relationships may simply be irrelevant in the new environment of permanently low interest rates.

If it turns out that 4.75 per cent really is the peak level of interest rates for the foreseeable future, consumer and business confidence should enjoy a big boost. House prices should stabilise and may eventually rise further. Consumers and homeowners will become less worried about excessive borrowing. And today’s unprecedented debt levels will start to be seen as a permanently higher plateau, attributable to low interest rates, financial deregulation, greater job security and the increase in Britain’s real living standards, thanks partly to cheap imports from China and cheaper services provided by immigrant labour.

But will 4.75 per cent really prove to be the peak level of rates? Nobody can make confident predictions about the long-term monetary outlook, but for the next year or so the case for lower interest in Britain is quite clear. The economy has grown by only 2.2 per cent in the past four quarters, well below its sustainable long-term trend, estimated at between 2.5 and 3 per cent. Unemployment has risen, albeit marginally, in the past six months and the only net new jobs created in the economy since 2001 have been in the public sector. But the Treasury’s spending plans call for a significant slowdown in public expenditure and employment from 2007. This means that the private sector will soon need a boost if it is to fill the gap created by the planned easing of public spending.

Until recently, the Bank’s hope was that export growth would accelerate as public spending slowed. But with overseas growth turning out to be weaker than expected, especially in Europe, domestic consumption and investment, not exports, will have to fill the demand gap that will be created from 2007 onwards if Gordon Brown sticks to his public-spending plans. Given that interest-rate changes take 18 to 24 months to achieve full impact, now is the time to act to sustain momentum in 2006 and 2007.

But if weak demand is the main argument for monetary action, low inflation is what gives the Bank freedom to act. Inflation, which is running at 1.9 per cent on the official measure, is marginally below the 2 per cent target and shows no sign of acceleration. The low level of inflation is what allows the Bank to contemplate easing policy today. In this sense, the promise of lower interest rates, leading to the possibility of faster economic growth and better employment conditions in the near future, can be directly attributed to trade union reform, deregulation, globalisation and immigration. Between them these structural changes in the British economy have exerted unprecedented downward pressure on prices and wages, even during full employment. As a result the Bank of England now has a leeway in monetary policy that previous policymakers could not have imagined in their wildest dreams.

Yet a reduction in interest rates will not be without risks. House prices and mortgage borrowing could rebound surprisingly quickly if consumers convince themselves that they will never have to face interest rates higher than 4.75 per cent. If Gordon Brown fails to rein in government spending and employment, the upward pressure on wages could soon become intolerable as the public and private sectors accelerated at the same time.

By the middle of 2007, or even earlier, Britain could again be facing a serious inflationary threat and experiencing a bubble in house prices and mortgage borrowing. Under these circumstances the exuberance of homeowners and consumers would need to be snuffed out — and that might require a return to high interest rates.

For the Bank of England, the quid pro quo for stimulus today should be a willingness to raise interest rates aggressively if the economy accelerates too fast. As Keynes said: “When the facts change, I change my mind.” And nobody should be readier to change his mind than a central banker.

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