Outlook: King heads for choppy waters without his trusty sextant

Scent of recovery; Crestor concerns
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The Independent Online

The new Governor of the Bank of England, Mervyn King, demonstrated yesterday why he is going to be the public face of monetary policy in a way that his predecessor never was. Sir Edward George may have been recognised throughout every boardroom in the land and every dining club in the City. But he never hosted a televised press conference to explain the Bank's thinking on the economy and defend its latest interest rate decision, much less submit to question and answer sessions. He remained aloof, or at least detached, and to that extent it was never easy to divine his views. His speeches were always carefully scripted, anodyne and often unmemorable. As were his regular forays to the regions, except for the occasion when he allowed himself to agree that unemployment in the north was a price worth paying to curb inflation in the south. At the monthly meeting of the Monetary Policy Committee, Sir Edward invariably voted last and with the majority. Nor did he ever have cause to use his casting vote.

Mr King will be a different proposition. His will be a much more visible and high-profile role. The risk, of course, is that this will personalise monetary policy, colouring debate within the MPC and making its interest rate decisions appear to be those of the Governor rather than the MPC as a whole. Indeed, the Bank's surprise quarter-point rate reduction in July after the first meeting chaired by the new Governor was widely characterised as King's cut. Simply by fronting the publication of the Bank's quarterly inflation report, the new Governor will provide us with a much greater insight into his view of the economy.

But why not when the inflation report is to the Bank what a quarterly set of results is to a public company? As chairman of the MPC , Mr King is right to more accountable. Increased visibility, therefore, will be no bad thing. Where the Bank has a challenge on its hands is in the lack of visibility elsewhere.

The Governor quipped yesterday that the fog of war had been replaced by the mists of the trade statistics - a reference to the way that fraud and computer glitches at Customs & Excise have tainted the raw import and export data.

He might have added that the picture has also been clouded by uncertainties over the strength of the global recovery, rising levels of consumer debt and the stubborn refusal of the housing market to show any real signs of significant slowdown. The Bank's central projection is for house price inflation to fall to zero over the next two years but as the Governor cheerfullly says, there is almost certainly no prospect of that actually happening.

The broad picture, says the Bank, is little changed from its last inflation report in May and consists of a gradual improvement in the world outlook and business investment, moderate growth in consumer spending and rip-roaring increases in government expenditure - the main reason why the Bank's growth forecast remains in touching distance to the bottom of Gordon Brown's range.

The justification for July's rate cut, we are now told, is that it was a "precautionary measure". The Bank apparently concluded that the risk posed to the UK economy by weak external demand was greater than the danger of exacerbating the debt-fuelled consumer boom by making it even cheaper to borrow money. The Bank acknowledges that levels of debt are now high and need careful monitoring. But it also points out that the kind of people taking on the biggest exposure are those most able to handle the risk.

So far the Bank has managed to stick within its symmetrical target of keeping inflation within a 1.5 to 3.5 per cent band but this has only been achieved by allowing a serious imbalance to develop in the economy between a booming consumer and housing market and a depressed manufacturing and exporting sector.

Managing the economy as that imbalance unwinds will be a difficult task, even with the stimulus of the Chancellor's public spending increases.

The task will be made all the harder by the changeover in November to a new target measure of inflation, HICP, which excludes house prices. Had HICP been adopted when the Bank was first given independence, then the last five years would have seen different monetary policy and lower rates. The Governor made it plain yesterday as politely as he could that the Bank would rather the change was not being made now.

Mr King has the challenge of steering his way through some very thick fog with a navigational aid which is not to his liking. If nothing else, the downside for the new Governor must be highly visible.

Scent of recovery

Peter Wuffli, president of UBS, declared in May that he sniffed the end of the bear market, though not yet the scent of a bull. Just as well, perhaps. Equity markets in Japan and the US have gained ground since then, spectacularly so in the case of the Nikkei, but in the UK and the rest of Europe they have continued to tread water.

Today, Mr Wuffli says his senses still tell him to be cautious. Admittedly, Europe's biggest bank turned in a strong second quarter profit performance on the back of increased activity in equity markets. But its star performer remained fixed income, the area of the capital markets that has been the saviour of a good few other big integrated banks.

Otherwise, the outlook remains uncertain. It is no more apparent now than it was three months ago where the momentum for a renewed bull run is going to come from. The long-term case for equities remains strong but so does short-term selling pressure. Confidence in the financial markets has yet to recover and no-one can yet quite put hand on heart and say the excesses fuelled by the investment-led dot.com boom have yet been flushed out of the system.

Corporate profits, meanwhile, remain extraordinarily difficult to grow in a low inflation environment, leaving little to underpin higher share valuations.

Finally, it is far from obvious where the economy in general is heading. The Bank of England, as we can see, reckons that the risk to growth remains on the downside while the Fed has again made plain its continued concerns about the threat of deflation de-railing the US economy. If it isn't too uncomfortable, Mr Wuffli, keep your ear to the ground and your nostrils in the air.

Crestor concerns

Who would work for a drug company? The lucky 5,500 employees at AstraZeneca's US headquarters in Wilmington, Delaware, will be lined up next week to have their cholesterol levels tested. The event is a "celebration" of the launch of the company's new anti-cholesterol drug Crestor, which got the green light from US regulators on Tuesday.

As a means of educating people of the dangers of high cholesterol levels, it is probably the cheapest stunt that AstraZeneca will undertake. The marketing proper will be much more costly. It is pushing its new pill into a crowded market which already boasts the world's biggest selling medicine, the mighty Pfizer's Lipitor, which has sales of nearly $25m (£15.6m) a day.

In the year that Crestor has been delayed by safety concerns, the growth in demand for these sorts of drugs has slowed sharply, from 11 per cent to barely 4 per cent.

The more serious question is what happens to the rest of the business as AstraZeneca strains the sinews to make Crestor the blockbuster drug investors crave. AstraZeneca cannot match its rivals' marketing muscle, and that often counts for more than the strength of clinical data. Important drugs such as Nexium, for ulcers, and Seroquel, for schizophrenia, might find themelves starved of support. Perhaps they should be checking blood pressure back at AstraZeneca's London headquarters.

m.harrison@independent.co.uk

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