Wind is with the Bank doves

DOVES at the Bank of England were in the minority earlier this month, but the force of the argument is very much in their direction. The odds are shifting decisively in favour of further cuts in interest rates early in 2002.

Although the British economy appears to be doing very nicely thank you, especially if one looks at retail spending figures, it is likely that once we pass Christmas this will ease downward.

Unemployment is starting to creep upwards, household debt (while sustainable) is at record levels and the odds are that the economy is going to perform far less well in 2002 than Gordon Brown believes.

The International Monetary Fund has put some clear blue water between the pre-Budget Report forecast of a 2% to 2.25% expansion and its own 1.8%.

With all three major economic regions, North America, euroland and Japan, battling with recession, Britain cannot be expected to survive in its bubble of prosperity for much longer.

One of the bigger mysteries of our sound economic performance is partly resolved by the latest indicators. These show that the October global trade balance was all but steady with a deficit of £2.3bn.

What is fascinating about these numbers is the deterioration of the balance with euroland, which has now moved into a deficit of £625m. Until now it has been argued that near balance with the European Union, at a time of a weak euro and relatively strong pound, showed that British business could live with the present exchange rate regime.

But what appears to have kept the UK in balance with euroland is not a competitive performance by corporations, but the higher price received from North Sea oil exports. Now that the oil price is down, the EU deficit is rising.

To understand why interest rates are likely to come down in early 2002, one has to look at the facts marshalled by December's Bank dissidents, the arch- dove Sushil Wadwhani and the more puzzling Chris Allsopp.

They believe we have entered a different world of lower prices, of which oil is just one. It is hard to argue. Japan is experiencing deflation with prices falling at a rate of 2% a year. Euroland has tamed the inflation dragon and prices have fallen below the 2% central bank ceiling.

In Britain, headline, underlying and producer prices are all well below the 2.5% central target.

Admittedly the oil price fall may be temporary, but not if the world economy performs as badly in 2002 as the IMF seems to think it will. The Bank of England has the duty to look at the medium rather than short term in setting interest rates.

Nevertheless, as the Chancellor frequently reminds us, Britain operates a symmetrical inflation target.

There is as much a duty to lower interest rates when inflation undershoots - as at present - as there is to raise rates when it overshoots. Failure to cut further will require Governor Sir Eddie George to write a letter to Brown explaining the missed target, not something he is likely to relish.

The betting must be that we will move towards even lower interest rates early in the new year. This will be terrific news for all those carrying too much credit card, mortgage and other debt. But for the millions of small investors with savings in the building society or bank, it is a bitter disappointment in the making.

Taken on trust
PROFESSOR David Blake of Birbeck College deserves high praise for his clear and hard-hitting report on the compromise plan proposed by Equitable Life.

It is hair-raising stuff and makes it clear that the non-guaranteed policyholders, especially those who joined the life fund after January 1994, received a raw deal. Certainly, the 2.25% uplift for the non-GARs under the compromise seems barely adequate, given likely underperformance in the months ahead.

Despite the stack of documents posted to policyholders, Blake makes it clear that they are being asked to make decisions on historic figures and without plain, concise information on future plans for the fund, such as what happens when the Halifax gains control.

As we have argued before, Vanni Treves and his team may be seeking to do the best for policyholders, but they are asking us all to 'trust them'. Equitable policyholders might well feel they have taken successive managements on trust for too long.

Anyone voting for the compromise must recognise that it is not a complete answer to their troubles, merely the better of two poor alternatives.