King trumps the experts

ONCE again City economists have been left with egg on their faces. Polling has consistently shown them forecasting no interest rate cut in July and the Monetary Policy Committee has chosen to confound them.

This is, of course, a very different MPC from the one headed by Sir Eddie George. The weight of Bank of England insiders is considerably weakened by his departure.

At the same time, the voting pattern of newcomers Richard Lambert, at his second session, and Rachel Lomax, making her debut, are unknown. So the form book of new governor Mervyn King's committee is less reliable.

The widespread assumption has been that because King is generally cautious on rate cuts, this is the way it will always be. But, as the US Supreme Court and the BBC under the chairmanship of Gavyn Davies demonstrate, you can appoint likeminded people to office, but you cannot control their independence-once they are there. Having been wrong-footed twice by MPC activism, in February and again now, a Reuters poll of economists after the rate cut showed that of 35 questioned, 21 believe that at 3.5%, interest rates have reached the lowest point of this cycle.

The biggest dissenter to this majority view is Roger Bootle, adviser to Deloitte & Touche and one of the first British economists to recognise the end of the inflationary era. He forecasts that base rates could fall to 3% by year end - and he may well be right.

Careful reading of the Bank's well-organised statement points to the fact that inflation, as currently measured, is almost certainly overstated as a result of energy and housing factors working their way through the system.

This will be even more so when we move to the European 'hiccup' measure of inflation, which removes housing altogether and switches us to a more sophisticated statistical base.

Another factor allowing interest rates to fall is the 4% rise in the pound since it reached its trough in May. As Bootle notes, it is 'now well above the MPC's assumed path for it'. One of the characteristics of the George-led MPC, in my view, was its close attention to the exchange rate.

This was partly a result of the former governor's experiences in the war room of the Bank of England during the turbulent days leading up to Britain's ejection from the European Monetary System in September 1992.

What everyone can agree is that the indicators released in the runup to the MPC meeting mostly pointed toward a slowdown. This, together with the downward revisions to growth in the first quarter of this year (and now we learn in 2001 and 2002), suggests a far less robust economy than had been hoped.

We are feeling the draught from a slowing world economy, with only the United States showing any real prospects of recovery.

Even across the Atlantic there are problems despite George W Bush's huge fiscal boost and a 1% federal funds rate. In his latest testimony, Federal Reserve chairman Alan Greenspan warns that higher energy prices and gas shortages are having an adverse affect on growth.

So we should be keeping optimism about America in perspective too.

Yell silenced
THE sweat on the brows of some private equity firms will be drying following the market enthusiasm for the Yell flotation. Coming soon after Benfield, in the booming Lloyd's of London sector, it suggests that institutions, flush with cash, are more than happy to absorb newcomers.

Before anyone becomes to excited about Yell, it is worth bearing in mind the note of caution sounded by Citigroup Smith Barney. It has serious concerns about the regulatory arrangements for Yell in Britain, which are far from transparent and could expose investors to risk.

As a frequent visitor to the US, I would also have worries about prospects there. Cut-throat competition is evident with negative advertising filling the TV screens. Impressionistic this may be, but directory advertising is not a market - or for that matter a share - for the faint hearted.

Atkins options
A NEW book on the Atkins diet, with its high protein, high fat content, is surging its way up Britain's bestseller lists, outsold only by JK Rowling.

Maybe it is time to think about some unfashionable quoted meat companies such as Cranswick (sausages), Devro (sausage skins) and Kerry, the Irish bacon producer. The king of them all, the private Vestey family with its extensive butchery interests, must be sharpening its knives.