The Bank takes refuge in the unpredictable

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The Independent Online
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?