Rate-setters put their credibility on the line

Corus line-up; House hunting  
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The Independent Online

The Bank of England's surprise cut in base rates shows that even City economists occasionally get it wrong. Shocking really. All 26 of the pointy heads polled by Reuters last week predicted that the Monetary Policy Committee would keep rates on hold yesterday.

Oddly enough the biggest shock at the quarter-point reduction was felt amongst those who had been lobbying hardest for it. The CBI was caught so badly off-guard that it rushed out a press release applauding the Bank's move to stave off the effects of the "world economic downtown".

Downtown was indeed where most eyes in the City had been focused. The boom on the high street, the surge in credit lending and the "unsustainable" rise in house prices surely meant that only the gentlest of the doves on the MPC would vote for a rate cut.

But the attention of the MPC was evidently overseas. And what it saw was a strong pound crucifying exporters and a general weakening in the world economy which had to be offset by measures to sustain domestic demand.

There is the merest hint in the statement accompanying the MPC's decision that it had also begun to detect a weakening in retail sales which has not yet shown up in any official figures. Sir Alan Budd, the former Treasury mandarin, claims to have spotted the onset of the 1990 recession when he went to the Lakeside retail centre in Essex and observed shoppers coming out with nothing but small M&S bags. Perhaps the Bank's deputy governor Sir David Clementi has copied the technique and had his regional agents on Arndale duty for the last week.

The Bank reckons that yesterday's cut will not put the 2.5 per cent inflation target at risk. But what it also suggests is that the MPC has woken up to the fact that 2.5 per cent is the mid-point in its target range, not the ceiling. Inflation can rise all the way to 3.5 per cent before the Governor has to write a grovelling letter to the Chancellor.

A rate cut at a time when the economic outlook is "highly uncertain" to use the Bank's phrase, is brave indeed. It certainly surprised Barclays' Matt Barratt who seems to have been looking at an entirely different set of data to the MPC.

What the MPC must also hope is that it does not prove counter-productive. Sometimes, surprise rate cuts re-inforce the fear that recession is around the corner and rather than nipping it in the bud, merely deepen the gloom. Look at the US where six consecutive rate cuts, lopping 2.75 points off rates have done virtually nothing to restore confidence. The extreme example, of course is Japan, where a policy of zero interest rates has produced deflation and a state of semi-permanent recession.

The MPC's move also looks brave when only last month it voted 8:1 to keep rates on hold. For good measure it said the next move could just as easily be upwards and expressed satisfaction that the strong pound was acting as a brake on inflation.

For now the MPC looks to be in unchartered territory. It could discover that yesterday's rate cut was a mistake which will stoke up inflation. Equally, it could now be pushed into a further series of reductions and yet still not avert recession. Either way, its credibility is on the line as never before.

Corus line-up

Well there's a thing. Sir Brian Moffat sent his headhunters off to scour the world in search of a new chief executive to run his steel company Corus and all the time the best candidate was sitting right there beneath his nose.

Not only that, Tony Pedder is a chip off the same ingot. The 6,000 job losses and south Wales plant closures that Sir Brian deemed necessary to keep Corus afloat have been enthusiastically pushed through by Mr Pedder in the strip products division that he ran until yesterday.

The steel industry has a long history of promoting from within so perhaps we should not be too surprised that Corus has gone inside yet again to appoint a chief executive who has been with the business man and boy. Sir Brian himself has molten iron running through his veins, as did his successor, "Black" Bob Scholey, the scourge of the Sheffield steel mills.

Corus isn't saying how many serious external applicants there were. But the betting is they could have been counted quite comfortably on one hand. Remembering the fate that befell Corus's previous joint chief executives, John Bryant and Fokko van Duyne, it seems unlikely that many people with a job elsewhere were queuing up to test their mettle against the Moffat.

Mr Pedder says that Corus can begin to look forward to brighter times now that the pain of the rationalisation is behind it and UK production is now geared to UK demand. Ceasing to export steel from Corus's former British Steel plants should, in theory, mean that the company's fortunes are less firmly hitched to exchange rates.

In theory, its fortunes should be much less firmly hitched to exchange rates.

But the reality is that steel is still priced in a weak currency, the euro, which makes it hard for Corus to protect its domestic market against Continental imports, much less dumped east European steel. That home market, too, is continuing to crumble away as talk of recession takes hold and manufacturers find ways of making things with less steel or none at all.

Mr Pedder hopes he won't have to revisit the line in the sand that Corus said it had drawn after the jobs devastation in south Wales. But with Sir Brian hovering over his shoulder, the first job he must protect is his own.

House hunting

Offers have been dropping through the letterbox for Alfred McAlpine's housebuilding division like begging letters from estate agents for the past two years. So far its chief executive Oliver Whitehead has thrown them in the bin along with all the other junk mail. Now, however, comes an approach from the rival housebuilder George Wimpey which he has little option but to take seriously since it values the housebuilding division at £100m more than McAlpine's entire market capitalisation.

Consolidation is the buzz word in the sector at the moment and Peter Johnson, who now runs Wimpey, is in a hurry. This year he has been outflanked by both Persimmon and Taylor Woodrow who have snapped up Beazer and Bryant respectively. Those deals, and the cost savings that go with them, have made Mr Johnson's merger of Wimpey's two existing housebuilding businesses look like a modest sideshow by comparison. Now he wants to use McAlpine as the building block to instant domination of the UK housebuilding scene.

The market would rather like to see how well Wimpey's internal rationalisation works out before Mr Johnson spends £450m buying a business in a very different part of the neighbourhood. It also worries that Mr Johnson is paying a handsome price at a time when the downturn could act like a wrecking ball on the housing market.

The premature disclosure of the deal could yet result in its collapse although it looks to be too far down the track to be aborted now. If it does go ahead, perhaps as early as today, there will be tears at the end of the garden sooner or later.

m.harrison@independent.co.uk

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