Bank spells out debt fears

RACHEL Lomax stole the show from her boss Mervyn King in her debut before MPs. But the tune belted out by the new Bank of England deputy governor was familiar.

The Bank was right to be cautious about lowering interest rates, given prevailing levels of personal credit in the economy. 'Anyone with my experience is going to be worried about debt, current levels of debt and the housing market,' Lomax told the Treasury Select Committee.

Her comments came against the background of last week's decision by the Monetary Policy Committee to cut interest rates by a quarter point to 3.5%, bringing the cost of borrowing down to its lowest level in 48 years.

Many of the big mortgage lenders have followed suit by lowering their standard home loan rates, with Nationwide knocking 0.1% off its standard variable rate - now at 4.54%.

Lomax picked up the current popular theme among central bankers. She suggested that 'it would be unwise to dismiss the risk of deflation, and the possibility that monetary policy might become less effective as interest rates fall to lower levels'.

On the personal front, she was dismissive of committee suggestions that she was just a Whitehall insider. Although she spent much of her career in government service, Lomax also served as chief executive of the World Bank in Washington.

The new governor Mervyn King appeared determined not to give away too much of the Bank's thinking ahead of the release of its next Inflation Report in August. King could not be sure if 3.5% was the right level for interest rates, and also steered clear of comments in the value of the euro. His predecessor Sir Eddie George often expressed the view in the past that the single currency was undervalued.

With the government expected to switch to a new inflation target at the time of the pre-Budget report in November, King argued that the target would have to be lowered as Britain moved on to the same basis as its European partners by adopting the harmonised European prices index HICP - also referred to as ' hiccup'.

He noted that in the 'short run, inflation may well move from above to below the target'.

Evidence of the downward trend in prices comes from the latest British inflation data. RPIX, the index currently followed by the Bank, is on a downward trend having fallen to 2.8% in May. The main impetus came from the housing market, and there may be more to come as last year's big price rises unwind. Goods prices also appear to be falling.

The same downward trend can be seen on the hiccup measure, which fell from 1.2% to 1.1%. This suggests that even if a lower inflation target is set by the Treasury, interest rates still have scope to fall.

Greenspan juggles
ON the other side of the Atlantic, analysts struggled to interpret Alan Greenspan's characteristically elliptical comments in his semi-annual appearance before Congress.

Greenspan signalled clearly that interest rates, at 1%, could remain there for some considerable amount of time. Indeed, we may yet see them as low as 0.5% by year end as the Fed battles to keep recovery going.

He was also seeking to send a complex message to Wall Street. Since rates were lowered to 1% there has been a huge move out of bonds into shares. The result has been that bond prices fell and yields rose, which ironically pushed mortgage rates up, since the US home loan market is governed by longer-term rates, not by market rates as in Britain.

This is a delicate operation, as the Fed does not want to snuff out the equity rally either - seeing it as a critical element in building confidence-Greenspan argued that easier tax and interest rate policy ought to 'bolster economic conditions'. Wall Street seemed less than impressed and eased downwards. The current war between the bond and equity market bulls looks set to continue.

Chairman's prerogative
CHAIRMEN seem to find the job of chief executive irresistible when they suddenly find themselves in charge.

Sir Peter Middleton at Barclays never seemed happier than in the interregnum between Martin Taylor and Matt Barrett when he pressed full steam ahead with rationalisation plans - even setting branch closures in motion.

John Windeler found it almost impossible at Alliance & Leicester to give up the reins after Peter White fell on his sword after the Bank of Ireland merger fiasco.

Now John McGrath at Boots is flirting with the idea of a bid for Durex and Dr Scholl's group SSL, where Reckitt Benckiser is also sniffing around. Another contested bid perhaps - things are looking up.