What does the Bank know that we don't?

THE BANK of England has acted boldly to cut interest rates by half a percentage point, rather than the creeping quarter reductions normally favoured by central bankers. Even more surprising is the fact that the somewhat dilatory European Central Bank did the same.

After seven cuts this year, UK interest rates now stand at just 4%, their lowest since the early 1960s, when the Beatles stormed on to the pop scene. The ECB, which has been more cautious in its pruning, has taken euro-zone rates down to 3.25%. The reductions, which follow a similar move earlier in the week by US central bank the Federal Reserve, are being widely welcomed by the devastated manufacturing sector.

They come on the eve of the World Trade Organisation talks in Doha, Qatar, where trade ministers are gathering in the hope of restoring some confidence in the aftermath of 11 September. The Monetary Policy Committee said its decision reflects evidence that world economic activity has weakened and that the global slowdown may be deeper and longer than previously thought.

So far, the UK has held up reasonably well. High Street spending has been remarkably resilient. Car sales were up 21% last month and housing starts were 10% higher than last September. That does not sound like an economy heading for the rocks. But consumer confidence is probably much more fragile than it seems.

Retail sales have been buoyed up by consumers' willingness to build up debt, and that is unlikely to last in the current climate, with redundancy announcements being made practically every day. At the same time, households have seen the value of their stock market-based assets fall, adding to their nervousness.

Leading lenders, including the Abbey National and the Halifax, moved swiftly to pass on the cuts to borrowers, giving a fillip to the property market. Nonetheless, the outlook for house prices is fairly negative, again because of the spectre of redundancy.

Chancellor Gordon Brown will be carrying out his own balancing act in his mini-Budget on 27 November. The costs of fighting terrorism, and higher social security bills for those who have lost their jobs, will put pressure on the public purse. But he is likely to be wary of big tax hikes for fear of deepening the gloom. Mike Warburton at accountants Grant Thornton reckons that the pre-Budget report will be neutral in its impact, with an emphasis on avoiding a slide into recession.

The rate cuts are, of course, dire news for savers, many of them elderly. They will see their dwindling incomes fall yet again. And the MPC's decisive action could backfire if the larger-than-expected reduction is taken as a signal that the economic situation is much worse than we thought.

Several economists expressed their surprise at the move. They are wondering what the Bank knows that we don't.

Ringing the changes

FEW tears were shed in the City when BT chief executive Sir Peter Bonfield last week announced he is to take an early bath. But the premature departure of highly-respected finance director Philip Hampton is a different matter.

The key question is: Who is going to run BT? Hampton, the architect of the group's spin-off of mobile arm mm02, was once regarded as the heir apparent to Sir Peter. He is said to have handed in his notice after falling out with chairman Sir Christopher Bland, who was brought in earlier this year to replace Sir Iain Vallance. BT denies any squabbling between the two - but then it was only a couple of days ago that BT denied Hampton was quitting.

It leaves the company scrambling to fill not just one, but two, boardroom positions, a situation that has prompted even its own broker, Merrill Lynch, to downgrade the shares.

Hampton, who earns £435,000 and is on a one-year contract, will not leave empty-handed, even though he is not in line for the seven-figure golden handshakes doled out to Sir Peter and Sir Iain.

In contrast, long-suffering shareholders have been told not to expect much in the way of a dividend from now on. Members of the company pension fund also learned that BT is having to pour in hundreds of millions of pounds of extra cash to top up the battered fund, which would show a £4bn deficit under new accounting standards.

Candidates for the top jobs at BT have so far been rushing to rule themselves out. Considering the state of the company, that is hardly surprising.