Banker who goes against grain

AT A TIME when the financial markets are starting to panic about an upsurge of inflation, Sushil Wadhwani, a member of the interest rate-setting Monetary Policy Committee, is a voice of calm and reason.

Far from accepting the market view that base rates will have to rise sharply to combat higher prices, following a surge in the retail prices index in January, he believes that the increase is a blip. 'My suspicion is that in the second quarter of this year the number will be somewhat lower,' Wadhwani says in his office overlooking the Bank of England's courtyard. 'A cursory look at the numbers suggest to me that quite a lot of it was transient,' he adds.

Wadhwani's views are significant since only a few days earlier the deputy governor, Mervyn King, who is responsible for monetary policy, expressed some concern that when temporary factors, like motoring and fresh food prices are stripped away, it was possible that underlying inflation might be heading upwards.

'I think it is vastly premature to get worried about this. We are starting from a tendency of having undershot the target [of 2.5%] for much of the last three years,' Wadhwani says.

In his three years on the MPC, Wadhwani, a Kenyan Asian by birth, has earned a reputation as one of the doves on the committee, tending to vote for lower interest rates, although it is not a description he entirely welcomes. He accepts, however, that since December 2000, when the scale and drama of the American slowdown became clear, he has tended to vote in a 'dovish direction'. This tendency is confirmed by the minutes of the February session of the MPC where Wadhwani was one of two voting for a quarter point cut in rates.

'My view was primarily driven by a different judgment on the international economy and the impact it might have on us,' he says. 'I felt that the situation in the US had been looking unsustainable for a while and one felt that when it turned it would not be some minor, short-lived affair, but would go on for a little while.' In fact, Wadhwani would have liked to have seen the Bank 'react a bit more rapidly' to head off the serious retrenchment in the United States.

His willingness to challenge the conventional wisdom has won him a following among City economists who would like to see him appointed to a second three-year term when his current tenure expires in May. But there is concern that the Treasury is reluctant to give outside members of the MPC a second turn around the track.

Now in his early 40s, Wadhwani brings a very different personal experience to the table of the nine-person MPC. He is the only member to have worked for a hedge fund, the highly-leveraged investment vehicles which take huge bets on markets with the aim of enriching the wealthy individuals who place money with them. The irony of Wadhwani now working at the Bank is not missed.

Hedge funds are not a favourite on Threadneedle Street. It was the Quantum Fund, headed by financier George Soros, which was partly responsible for the assault on sterling which led to Britain being dumped unceremoniously from the exchange rate mechanism in 1992. This was despite a rearguard action of intervention and higher interest rates, led by Eddie George in the boiler room of the Bank.

Wadhwani earned his spurs and a reputed fortune working for another hedge fund, the Tudor Group, for four years to 1999. He is very much the poacher turned gamekeeper. 'The explosion in the number of hedge funds is at first sight worrying,' he says. 'You have a number of players with little experience of investing on a leveraged basis entering the market.

'A lot of the more experienced practitioners have long ago closed their funds to new money, therefore you are getting new hedge funds emerging to take advantage of huge pent-up demand to invest in them. This is something that we are going to have to watch closely.'

He notes that hedge funds can make markets more efficient. But they can also cause distortions, as in the Asian crisis of 1997-98, when in Indonesia the currency went from 2,500 to 15,000 to the dollar, causing 'unnecessary suffering'.

Wadhwani is a quietly spoken, courtly figure. A comfortable childhood in Kenya, where his father was a shopkeeper and exporter, was interrupted by the 'Africanisation' policy of a new generation of leaders. The family business was sold under pressure and, at the age of nine, Wadhwani was sent to an English- style boarding school, Mayo College, at Ajmer in Rajistan, India, to continue his education.

His parents settled in England and after taking Cambridge Board GCEs, Wadhwani was transferred from his Indian school to a sixth form college in the north London suburb of Stanmore to do his Alevels. 'It was a stressful period,' he says. 'But much more so for my parents than for me. For my father it meant starting a new life in the UK in his late fifties. It was very difficult for him.' His father opened a souvenir shop in central London. He was soon to experience the underside of Britain's famed tolerance, when he was beaten up twice in unprovoked racist attacks.

In comparison, Wadhwani enjoyed a charmed life. A ' dedicated band' of teachers at Stanmore helped him to catch up with his A-levels and he won a place at the London School of Economics. There he earned a first class degree in economics, stayed on to do a masters and PhD on the effects of inflation on employment and spent a further seven years on the LSE faculty before joining Goldman Sachs.

There he was appointed head of equity strategy. In this role he worked closely with economist Gavyn Davies, a Labour supporter and friend of Gordon Brown who has since gone on to become chairman of BBC.

Working in the real world of markets was 'valuable' experience because a 'lot of my preconceptions were challenged', Wadhwani says.

Like other MPC members, he is concerned about the twin-track economy in which the consumer sector booms, while manufacturing is in the doldrums. In his view, the manufacturing slump can largely be blamed on the collapse of information technology and communications, where much of the growth in 1995 to 2000 was focused.

'When we got a rapid global slowdown, that sector went from explaining its growth to explaining the fall,' he says. But he does not believe that monetary policy should 'deviate from the MPC's remit' to deal with the imbalances.

Some members of the committee argue that interest rates should be kept higher than necessary, to hit the inflation target two years out and curb housing debt. Wadhwani profoundly disagrees. In his view, to do so might lead the 'exchange rate higher than it might otherwise be, which would worsen the imbalances'. You might also 'hurt an already weak corporate sector', he says. Then if there were to be another shock to the system, unemployment would rise more quickly. 'This might unsettle the consumer.'

On the most contentious political issue facing Britain in the coming years, whether or not to join euroland, Wadhwani appears more favourably disposed than some of his MPC colleagues, including the governor Sir Eddie George. 'I can see the long-term advantage that would help productivity.' But he cautions that going in at the wrong time 'could lead to significant difficulties'.

Among the present band of MPC members, Wadhwani stands out as someone with great intellectual clarity and independence of thought, as demonstrated by his views on the euro. He would be a huge loss if not reappointed.