Bean counters Bank's critics

CHARLIE Bean's speech at the Institute of Economic Affairs seeks to slay a few dragons. He argues that the Bank of England is not out to 'clobber the consumer' even through recent interest rate change statements from the Monetary Policy Committee have noted the strength of the housing market.

The Bank's own financial stability wing has also been issuing ever tougher warnings about household debt accumulation.

The Bank's chief economist is dismissive of those who suggest that one big rise in interest rates might be more effective than two smaller ones. Bean says there is 'no empirical evidence' to support this. Maybe not. But whereas a quarter-point rate rise is barely noticed, a half point is likely to have a greater psychological impact.

Even though Bean appears less concerned about the housing market than some of his colleagues, he nevertheless signals that prices are coming down. In his view, the Bank should, if anything, be seeking to engineer a soft landing rather than an almighty crash of the kind seen in the early 1990s.

City scribblers will have a great deal of fun with the latter part of Bean's speech which focuses on the detail of policymaking.

At present the Bank of England uses the current interest rate and projects it forward to estimate where inflation is going to be in two years' time. But from now on the MPC will use a moving target based on market expectations.

It is worth noting that financial markets are now pricing in 5.5% interest rates by mid-way through next year, which is the best guide we currently have.

As for next week's MPC session, it now looks odds- on that the Bank, acting pre-emptively early in the cycle, will be lifting rates from the 4.5% hit in June to 4.75%.

Most of us can look forward to higher mortgage bills.

Crosby chutzpah

ONE mortgage lender already drawing in its horns is market leader HBOS. It has cut back its share of the new home loans market from 23% to 17% in recent months, arguing that there is no sense in taking on marginal business at this late stage of the housing cycle when prices are still booming. It suggests that some of the slack is being taken up by Nationwide and Barclays.

HBOS chief executive James Crosby remains a stock market pin-up for continuing to deliver. The ratio of costs to income, a key measure of efficiency, fell to 38.9% in the first half of the year, from 42.1% in the same period of 2003.

On the revenue side, the biggest boost came from fees which added 18% of income, against 7% for interest charges. Despite adventurous lending to venture capitalists - Bank of Scotland is Philip Green's lead banker - Crosby is adamant that this is not risky. Now that HBOS has established itself in the marketplace it is profiting from the upfront fees and is able to syndicate out the riskier lending.

Less attractive to the consumer will be Crosby's admission that personal customers are also paying higher fees for overdrafts. In the case of 'basic bank accounts' presently running at a loss, HBOS has lengthened clearing time to six days, which he admits is 'disappointing'.

As for the Spanish revolution on Britain's High Streets, with Santander swallowing up Abbey, it holds little fear for Crosby. He disbelieves the claims being made for the Spanish bank's IT systems. He also suggests that the cross-shareholding relationship between Santander and Royal Bank of Scotland is not sustainable.

Sour grapes perhaps. But coming from Britain's newest banking force, which is delivering on most of its key targets from current accounts to the premium One credit card, it has to be taken seriously.

Drugs courage

IT is encouraging that Britain's pharmaceutical industry is willing to take on animal rights extremists. The decision by the big three, GlaxoSmithKline, AstraZeneca and Pfizer, to provide £1m a year to Britain's universities over each of the next four years to fund animal research is brave.

We must hope that the great research universities like Oxford and Cambridge will accept the big drug money and refuse to buckle under threats of terror. Properly supervised, humane research is important to improving the lives of millions of people, including those with Alzheimer's disease.

Jean-Pierre Garnier, GSK's chief executive, is right to brand the extremists as 'cowards'. It would be tragic if a government fixated on cruelty to foxes were to be a bystander while billions of pounds of investment in one of Britain's most competitive research-based industries was driven overseas.