Markets move too fast in hope of a rate cut

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Traders in the money markets are back from their summer holidays in ebullient mood. Encouraged by the Halifax and Abbey National, they have concluded that base rates will fall - not this week, but in time for Christmas. As far as Thursday's meeting between Mr Clarke and Mr George is concerned, there is now no need to move interest rates down even if that had been their original intention - which seems unlikely. The big mortgage lenders have already eased monetary policy enough for now, spooked by the state of the housing market.

The conclusion that a base rate cut will follow later in the year rests on three assumptions, each of which could be wrong.The first is of quite heroic proportions; it is that the slowdown in economic activity we have seen over the course of the summer brings firm evidence of lower inflation to come.

The figures have certainly tipped the balance of the finely-balancedargument between the Chancellor and Governor. But measures of the real economy form only part of the monthly assessment of policy and the rest - inflation, monetary indicators, the exchange rate - are not yet flashing a green light for lower rates.

The second premise is that there is no danger of a wage-price spiral starting up, especially as unemployment has stopped falling. But other people's job losses have only a small effect on wage rates, and pay surveys have begun to signal increased settlements for the first time in months. Finally, there is the cheerful certainty that the Chancellor is not really working towards a 2.5 per cent ceiling for retail price inflation. While this might well be true it does not mean that the formal target will not come back to haunt him from time to time.

The Governor will almost certainly make a tactical retreat - if he has not already done so. His case has clearly weakened during the past 4 months. Yet this still does not make it a safe bet that rates will drop to 6.5 per cent by the end of the year, as the short sterling futures contract implies. The case for a cut is not yet strong enough to justify it. Indeed, it is too early to say that British interest rates can - or should - move down when next they move.

Not the decision Lloyds wanted

Lloyds must now rue the day it decided to tough it out in the courts against Julia Verity and Richard Spindler, who yesterday won a significant victory against the high street bank for giving negligent advice. Disgruntled customers are always challenging banks, but invariably, cases are settled on the quiet.

This time Lloyds evidently decided it wanted to prove in public that the encouragement it gave the two customers to borrow a substantial sum for speculating on the housing market did not imply any responsibility. In the event, the bank has got a well-publicised decision, but hardly the one it sought.

Try as it might to stress the limited significant of the Verity/Spindler judgement, there are good reasons for thinking it could have far reaching consequences.

The judge said that his decision does not constitute a precedent. Cases of alleged negligence will be decided, as in the past, on their merits alone. But it is naive to think that after yesterday lawyers will not examine complaints against banks in a new light.

Now that they know they can be successfully sued, banks will have to look hard at their advice procedures. Promotional material will have to be carefully reviewed. Bank managers tend to give advice the whole time; in future it looks as if they will be judged by the same standards as other professionals.

However, it would be unfortunate if yesterday's ruling were interpreted as a stimulant for the litigious. No-one wants to go down this wasteful American route.This makes it all the more necessary to improve the procedures and institutions for complaining about banks and for obtaining adequate financial redress. The banking ombudsman does a valiant job, but his remit is too narrow to satisfy the pressures of the market. The case for a fully fledged banking regulator to deal with retail banking complaints grows ever stronger.

A clear case for faster progress

The Treasury has laboured long and hard over the Chancellor's much vaunted Private Finance Initiative, which is intended to replace government money with private finance. So far, it has been promises, promises; the results have fallen far short of what was hoped for. The Treasury said in the spring that pounds 5bn of projects would be signed up this year, but only a handful of those have yet been signed and some of those in the pipeline are hideously prone to delays.

The concept of the PFI is clearly a sensible one and has cross-party support, with Labour claiming to have invented the idea in the first place. The idea is that the private sector, rather than Government departments, should finance projects which would more usually be undertaken by the state. That takes these projects out of the Government's spending equation and clearly makes the government more willing to say yes to new investments.

In some industries this appears to work very well. Racal yesterday announced a PFI bid for the Ministry of Defence's pounds 500m telecommunications project. The voice and data network is not in fact on the government's list of potential PFI projects and the MoD is not insisting that it become one. But Racal seized the opportunity to make its bid conform with PFI rules, to increase the attractions to the Treasury. The company will invest some of its own money in setting up the system, though it will also use existing MoD facilities. More important, the company will bear the risk of failure, the criterion for becoming a PFI. Its reward, if the bid succeeds, will be in fees from the MoD for using the network.

Racal's bid shows the PFI up for what it is. It was meant to encourage new projects that would otherwise have fallen foul of public spending restrictions. But the government must have communications networks whoever pays for them, and Racal's project does not represent additional spending, only a potential for cost saving. The real problem is that where it should be used to encourage additional investment - big infrastructure projects - PFI has become bogged down in Whitehall. Industry gets the worst of both worlds: falling government spending and a bureaucratic nightmare trying to prove that risks have truly been transferred from the government before a new project can be approved. When he gives the next PFI progress report later this month, the Chancellor should not boast about the number of projects in the pipeline but ask why they take so long to come through. An assessment of the extent to which PFI spending merely substitutes for essential public spending is also needed.

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