The Bank takes refuge in the unpredictable

Imagine the scene: 7.40am last Thursday; the morning meeting at an investment bank in the City. The director says: "That's enough gossip about the eclipse," and asks the economist to analyse the Bank of England's latest inflation report. Is inflation going up in the long term?

The economist, glances round the room, looking pleased with himself and replies: "I don't know."

"But you're paid pounds 150,000 a year, plus a generous bonus, to know," barks the director.

The economist could reply that his "don't know" might be worth millions to the firm if it stops the dealing room taking an institutional punt on steadily rising interest rates. That would echo market sentiment, but he knows it is best not to sound too clever by half. Revenge is easy and sweet for the executives who decide what his bonus will be this year. What the economist does instead is mask his ignorance and sound helpful. He offers to write a paper entitled "Uncertainty".

The Bank of England's latest inflation report may eventually earn a footnote in economic history because it has found a method of tabulating disagreement between members of the Monetary Policy Committee. What they are telling economists and bankers is that they ought to be paying more attention to unpredictability in economic behaviour. For example, unemployment should have been rising quite consistently this year, but it is not.

Since it is employment that is rising, wages ought to be rising too, but they are not. With interest rates down and commodity prices up, Sterling ought to be weaker, but it ain't. Maybe the pound is not overvalued. Maybe Gordon Brown has found out how to bust the trade cycle. Or, perhaps not.

The report tells us that some committee members believe that the exchange rate is on a random walk, and, since no predictions can be made about where it will end up, they prefer to assume no change in sterling. In that case, inflation would be 0.4 per cent lower than the Bank's estimate that it will rise to 2.75 per cent in two years. On the other hand, if the oil price stays at $19 (pounds 11.82) a barrel, inflation will be 0.2 per cent higher in 2001.

The report concludes: "Some committee members preferred assumptions that would raise the inflation profile by about 0.2 per cent at the two- year horizon. Other committee members preferred assumptions that would lower the profile by 0.2 to 0.6 per cent after two years." That is an awfully big margin for error.

The fact is that some members are right and others wrong. The other fact is that no-one has the slightest idea which is which.

Food for thought

THE BANK'S banking staff has fallen to around 2,000, compared with 5,625 before the end of exchange controls. Although the diminished number can still provoke envy and wrath elsewhere in the City, there are no longer enough gentlemen of the Bank of England to justify keeping open the nice club they had on the other side of Lothbury. A new canteen is being built for all grades on the seventh floor. (The Golden Trough, the exclusive dining room where the chief cashier, his cronies and the executive directors once ate well, closed five years ago.)

The worriers at the Bank are glad to think one canteen will create a more democratic environment, but they are concerned that, as older geezers leave, the Bank will lose its corporate memory. This is a proper cause for concern. Shortly after the collapse of Barings, I met a senior director who was then 57 years old or so, and he mentioned that he was soon to retire. When I express surprise at this he replied: "But I'm the oldest director at Barings Bank."

With such a contempt for experience, no wonder it collapsed. Mind you, the finest corporate memory in the City failed to save Warburgs.

Incidentally, here's some incidental intelligence: Nick Leeson has spent two days recently with the Barings liquidators, Ernst and Young, giving a step-by-step description of the way he worked his notorious "eights" account which hid his fraudulent dealing from Barings. The information may well find its way into the liquidator's negligence case against Coopers and Lybrand.

Silver anniversary

TWENTY YEARS ago this month, two legendary Texan oilmen named Bunker and Nelson Hunt got together with some Saudis and started a covert silver- buying spree in Dallas, Texas.

It was the beginning of an attempt to corner the market. Speculators had tried to corner grain, or soya beans, even pepper and bismuth, but never silver.

The silver price at the start of August 1979 was $8 an ounce. Within a month it had doubled. In the next five months, it rose to a peak of $52.50. Bunker and his allies - including Prince Abdullah, now the heir apparent to the Saudi throne - were talking silver up to $85 an ounce.

To force home the lesson that what goes up, comes down, here is what has happened to silver. Yesterday's price was $5.37, or pounds 3.34. The early August price of $8 was worth pounds 3.54 in 1979. Since pounds 1 in 1979 is worth pounds 2.92 today, that pounds 3.54 is now worth pounds 10.34.

What this means in real terms is that silver presently stands at one- third of the value it had before Bunker attempted his corner.

The lesson is: never listen to a silver bug. Or even a gold one for that matter.

Top rate

MY NEW credit card is accompanied by the information that the annual rate of interest on purchases is 19.7 per cent, or 1.51 per cent a month.

That helps explain the swollen profits of Britain retail banks in their interim statements issued recently. These proved once again that banking is an unusually profitable business. For reasons of prudence, no doubt, banks prefer not to strip out the profits from card services from other retail business, though Barclays comes clean. In the first six months of this year, Barclaycard made profits of pounds 196m, up 17 per cent from the same period last year.

The interim report mentioned that net interest margins remained at similar levels to the year before. A year earlier the basic rate of interest was 7.5 per cent - 50 per cent higher than it is today. It is little wonder that profits are up. How long will they be able to get away with it?

News
people
Sport
FootballGerman sparks three goals in four minutes at favourite No 10 role
News
Rumer was diagnosed with bipolarity, attention deficit hyperactivity disorder and post-traumatic stress disorder: 'I was convinced it was a misdiagnosis'
peopleHer debut album caused her post-traumatic stress - how will she cope as she releases her third record?
Sport
A long jumper competes in the 80-to-84-year-old age division at the 2007 World Masters Championships
athletics
PROMOTED VIDEO
Sport
Radamel Falcao was forced to withdraw from the World Cup after undergoing surgery
premier leagueExclusive: Reds have agreement with Monaco
Arts and Entertainment
'New Tricks' star Dennis Waterman is departing from the show after he completes filming on two more episodes
tvHe is only remaining member of original cast
Life and Style
Walking tall: unlike some, Donatella Versace showed a strong and vibrant collection
fashionAlexander Fury on the staid Italian clothing industry
Arts and Entertainment
Gregory Porter learnt about his father’s voice at his funeral
music
News
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
tvHighs and lows of the cast's careers since 2004
Life and Style
Children at the Leytonstone branch of the Homeless Children's Aid and Adoption Society tuck into their harvest festival gifts, in October 1936
food + drinkThe harvest festival is back, but forget cans of tuna and packets of instant mash
Sport
Lewis Hamilton will start the Singapore Grand Prix from pole, with Nico Rosberg second and Daniel Ricciardo third
F1... for floodlit Singapore Grand Prix
New Articles
i100
Life and Style
Couples have been having sex less in 2014, according to a new survey
life
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Senior BA - Motor and Home Insurance

£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

Market Risk & Control Manager

Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...

SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Head of Audit

To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

Day In a Page

Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam