Outlook: The case for keeping interest rates on hold a little longer

Egg on visage; Popularity contest
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The Independent Online

A rise in the cost of borrowing just in time for Christmas? The markets certainly think so following this month's much closer than expected vote on interest rates at the Monetary Policy Committee and adjusted gilts, share prices and the value of sterling accordingly.

The 5:4 result in favour of keeping base rates on hold at 3.5 per cent was without question much narrower than forecast. Most pundits had expected the kind of score normally associated with Manchester United playing non-league opposition. Grist for the mill, then, for those who confidently expect the hawks to tip the balance next month and reverse June's equally surprising precautionary cut in rates.

There are some perfectly respectable explanations as to why that could indeed happen and they are rehearsed at length in the latest Bank minutes. But there are also some plausible reasons why that might not be the outcome and, so, here goes.

First, the threat that the economy will overshoot the inflation target two years out unless interest rates are raised, is far from clear cut. Indeed, in many respects the danger to the inflation target, which is the measure used by the Bank in setting rates, is no greater than it was a month ago.

Second, with the exception of the housing and consumer markets, which show few signs of slowing, there has not been much in the way of positive economic news. In fact, if anything, the external environment with the exception of the United States, may have weakened a little.

Third, the way in which the individual members of the MPC voted last time around makes it difficult to judge which way they will jump in November. This month, two doves, in the shape of the outside members Kate Barker and Stephen Nickell, voted to raise rates, while two of the hawks, the Bank's Governor, Mervyn King, and the new deputy governor for monetary policy, Rachel Lomax, voted to keep rates on hold.

One of the hawks could revert to type next month and tip the balance in favour of higher rates. But equally Ms Barker could flutter back into the dovecote. It was, after all, her former employer the CBI which urged the Bank earlier this week not to choke off the recovery in manufacturing with a premature rise in rates. Tomorrow's GDP and retail sales figures and the next set of house price and business activity surveys will help shed some light in th darkness.

Fourth, Gordon Brown is about to give the Bank a new index for measuring inflation called HCIP or Hiccup for short which excludes house prices.

Were the new index in use now, then current inflation levels would be undershooting the target, not overshooting it as they are under the present RPI-X formula. Based on what target the Chancellor sets the Bank, it may prefer to allow the hiccups to settle down before it starts tinkering with interest rates.

The last time the Bank raised rates was in February 2000 - making this the longest period of stable or falling interest rates since the 1940s. Don't bet against the Bank clocking up a two-year anniversary come next February.

Egg on visage

You cannot build a business without running up costs any more than you can make an omelette without breaking the occasional Egg. The eponymous internet bank hatched by the Pru five years ago has learnt that in spades in France.

Egg may now have 3 million UK customers and account for one in 15 of all credit cards in circulation, but consumers on the other side of the Channel have had little difficulty in saying "Non" to this curious English import.

Having clocked up losses of €170m - or £117m in old money - in 18 months, Egg has decided it has had un oeuf of going it alone and is now looking around for a partner to share the pain. If it cannot find one by Christmas, it will be heading for the sortie.

This was not quite what the market had expected to hear and there was a scramble for the door yesterday on disappointment that Egg had not taken the opportunity of its third-quarter figures to cut its French arm completely adrift.

The mess Egg has got itself into in France is a classic case of how even the best-laid business plans can go wrong. France, the third largest unsecured lending market in Europe but with some consumer credit rates to make the eyes water, was just asking to be cracked wide open. Add to that a 50 per cent annual growth in internet usage and Egg and the French ought to have been made for one another.

But Egg counted without customer inertia and some very effective knocking copy from its rivals. It therefore found itself having to give the French elementary lessons in what a credit card is. (Since you ask, a convenient way of managing your cashflow, not a ruinously expensive way to borrow according to the Egg head, Paul Gratton. Perhaps Matt Barrett should take him along to the next Select Committee hearing.)

The result has been miserably slow progress. After 18 months, Egg still only has 58,000 French customers with balances totalling €126m. In the UK its customer base grew by almost three times that number in the last quarter alone.

There are some faint signs that things are beginning to come right in France. Balances are growing more quickly and another eight credit cards have been launched since Egg took the plunge, bringing some big retail names like Carrefour into the market and increasing customer awareness. But the improvement is too little and too late for Egg to justify finding the extra €130m of investment the business needs on its own.

The rumour in France is that the potential partners Egg is talking to do not include a big local name. A fellow UK bank can be pretty much ruled out which appears to leave another European financial institution.

But the talks are at an early stage and Egg has only given them another two months to reach a successful conclusion. All of which still points to Egg beating a retreat from its international ambitions come the new year.

Popularity contest

One man is Scottish, the other French. One has cut thousands of jobs, the other a few hundred. One talks of "mercy killings" while the other seeks ways of prolonging life. Guess who is more popular with the City.

The Square Mile cannot get enough of Fred "the Shred" Goodwin, the chief executive of Royal Bank of Scotland, and nor apparently, can the financial media, which has treated him to the most favourable coverage of any FTSE 100 boss, according to a survey out today.

In contrast, the name of Jean-Pierre Garnier at GlaxoSmithKline is Mudd. He comes bottom of the poll with a "favourability rating" of minus 193. Most, if not all, of which is down presumably to his little local difficulty recently over pay.

The authors of the report, a PR company, assert that loss of reputation is one of the biggest threats to business. To counter this it is important for chief executives to build the kind of favourable image that only, er, PR companies can generate through cultivating the press.

Well, up to a point, Lord Copper. Reputation is important, especially for consumer brands, but it should not be confused with popularity. Nor should chief executives get too carried away with how many favourable column inches their cuttings agencies produce. After all, today's business hero is tomorrow's villain and the bigger they come the harder they tend to fall. Just ask Michael Green.