Expect more rate cuts after Bank's respite

These days it is more unusual for the Bank of England's monetary policy committee not to cut interest rates than to take a paring knife to them. Since the downswing in the rate cycle began in October 1998, when rates stood at 7.5%, there have been reductions in all but three of the 10 months, producing some of the lowest mortgage rates in decades.

But it is too soon to assume that this is the bottom of the present interest rate cycle, despite the pause. Certainly, there is evidence that the long crisis in the British manufacturing sector may be easing. There have been three months of increased production now and the figures are broadly stronger than had been estimated. Moreover, CBI data suggest that the service sector is buoyant and consumer confidence rising.

Despite these factors, one should not lose sight of the fact that the Bank of England adopts a symmetrical inflation target and that it is price expectations, not the state of the real economy, which drive its decisions.

So what is the inflation outlook? By all accounts there is little to trouble the scorers. The headline rate of inflation is subdued and there is no reason to believe that the underlying rate will move very differently. A new survey issued by the British Retail Consortium shows that prices are 0.7% below where they were during the same month last year - the biggest decline recorded since the BRC began recording high street prices in November 1997. Moreover, the BRC has seen no sign as yet of a boom on the high street.

The one area of concern for the MPC may be the housing market. There are indications that the British love affair with property is recurring, with bricks and mortar being seen by some private investors as an alternative to what is perceived as an overpriced stock market. While the surge in house prices is patchy, some of the most critical regions of the country, notably London and the south-east, are starting to see boom-like conditions brought on by some of the best mortgage deals in a generation.

The Bank, which has been caught out in the past by swelling asset prices (and the ensuing wealth effect) is right to be cautious on this front.

Nevertheless, there are good reasons to believe there is enough juice in the lemon for a squeeze or two more before a halt is called to interest rate reductions. Although the pound has slipped to a 33-month low against the dollar, it is steady against a weakening euro.

The strong pound remains both a barrier against rising prices at home as well as a difficulty for industry, even if it has used the past couple of years of sterling strength to bring down the cost base. The pause in the frenetic interest rate cutting activity, does not mean the end despite events at the Federal Reserve last week.

Delivering value


With the proposed Post Office reforms, the government will now be able to tick off another box, when it provides its accounting of Labour in office. Certainly, the Post Office deserves commercial freedoms. For good reason it is the last major state-owned corporation to thrust towards the private sector. The Post Office is no basket case. It is profitable, earning £500m a year for the exchequer; it is efficient and has embraced new technologies.

The staff base is highly skilled with those at the counters capable of handling services ranging from the sale of stamps to the issue of passports and driving licences. In a society where social exclusion has become an issue, the Post Office offers even the poorest segments and those in rural communities access to financial services.

It is also, like the railways, a natural monopoly with a strong element of public service. But it is a delicate balance, with which which governments interfere at their peril.

Allowing new providers into the mail delivery can only undermine the economics of the system, however, with an estimated £100m of income drifting away. The government risks a railway-style disaster, despite the introduction of a new consumer watchdog.

What will be welcome is the freedom for the Post Office to borrow and spend on investment - so that it is ready for the e-commerce age.

The PO management is willing to tolerate the loss of some of its monopoly in the hope that it will eventually be allowed to privatise, providing stock options and all the goodies. But if in this process the value in the organisation is destroyed, this government - which came to office deploring the poorly directed privatisations of its predecessors - will only have itself to blame.

Green party


One has to hand it to Philip Green and his financial backers, the Barclay brothers. They are proving extremely adept at realising value from the Sears portfolio which they acquired early this year. In the latest deal Arcadia (which was previously known as Burtons) is paying £151m for the Sears womenswear brands, and branches of Warehouse, Wallis and Ms Selfridge.

This together with what is not being cut from Arcadia's existing network will, it estimates, give it 11.5% of the market.

It is a base from which to challenge M&S without that market leader knowing it, the company claims. But what is really fascinating about this is why it was necessary for Sears to allow itself to be taken over in the first place.

When the Sears board - urged on by Phillips & Drew - finally succumbed to the blandishments of Green, it was successfully argued that accepting the offer was in the best interest of the shareholders.

However, with the new owners set to clear a potential profit of £150m on the break-up and disposal of the Sears empire (with 40% going to Green) in a matter of months, former equity holders could well question whether the price was right.