Greenspan's lovechild comes of age

For some in the financial markets, the Bank of England's decision to leave interest rates unchanged when inflation is projected to bust the government's 2.5% target will look like a blatant dereliction of duty. The reason we have a monetary policy committee, they would argue, is so that the authorities cannot play fast and loose with inflation. We now have a committee of Kenneth Clarkes instead of just one.

Actually, the MPC should be applauded for its wait-and-see stance. As Mervyn King argued yesterday, there is no mechanistic link between the Bank's central projection for inflation in two years - about 2.7% - and the level of interest rates. The three-year history of the MPC shows that the Bank has consistently over-estimated the likely outturn for inflation, primarily because it has been repeatedly frustrated by sterling's refusal to fall. The high level of the pound has cut the cost of imports, helping to offset inflation generated by the domestic economy.

At some point, sterling probably will fall. But that depends on the euro reversing its 19-month decline against the US dollar and nobody knows for sure when that will happen. Aware that raising rates in anticipation of a fall in the exchange rate that might not happen would simply intensify the pressure on firms in the tradeable sector of the economy, the MPC - or at least a majority of it - is in no rush to act.

This may prove a foolhardy strategy, and there will be plenty of people in the City willing to say "I told you so" if inflation starts to take hold as a result. But for the time being, the MPC appears to be displaying a new maturity, with the expertise of its individual members clearly being felt in the decision-making process. Across the Atlantic, the suck-it-and-see approach has been tried with no little success by Alan Greenspan. If the MPC is becoming more like the Fed, that will be no bad thing.

Battling banks


The Barclays bid for Woolwich raises two immediate questions; one specific, the other more general. Take the specific first. Barclays is offering a hefty premium to the pre-bid Woolwich share price. But will it be sufficient to scare off other bidders?

There is a line of argument which suggests Woolwich is worth more to Barclays than to other possible bidders. Its mortgage book would be a handy boost to Barclays' ambitions to expand its presence in the home loans market. Its much admired internet bank would give Barclays - which has well over 1m online customers but which has not developed a stand alone internet bank - a very powerful position in the sector.

That will not stop others taking a long hard look at Woolwich. Even if they decide that the price of playing party pooper there looks too high they may feel encouraged to look further afield. That leads to the second question. In his report to the Treasury Don Cruickshank was cautious about banking consolidation, worrying that it could further weaken competition over current accounts, for example.

The Treasury, however, decided not to block bank mergers, so will the sector now see a mergers and acquisitions free-for-all? Lloyds TSB is one name that has been bandied about as a possible rival to Barclays for Woolwich. Bank of Scotland, loser in the battle for NatWest, clearly has unfulfilled ambitions. Even so, any outbreak of merger activity is likely to be more selective than simply "me-too". Bids will need to show similar focus to the Barclays move for Woolwich. Size alone is unlikely to sell - either to shareholders or the competition authority.

Impotent Opec


It doesn't take much at the moment to spook the markets when it comes to crude oil prices, and when the news emerged yesterday that US reserves have fallen to their lowest since the middle of the 1976 oil crisis, the reaction was predictable. Crude prices jumped back above $30 for the first time in six weeks, before falling back in late trading.

Attention is now focusing on Opec's next meeting, in late September. Bowing to pressure from the US, the producers' cartel has promised to turn on the taps if prices rise above its target band of $22-$28 a barrel.

However, analysts say that rather than acting as a ceiling on prices, $28 a barrel has become the floor: whenever oil prices fall below this level, the market assumes there will be no more quota increases and prices promptly rise again.

Opec has increased production by 235,000 barrels since Saudi Arabia threatened to take unilateral action in early July, but prices have remained stubbornly high. With the US presidential election looming, the question is whether the cartel is likely to opt for further quota increases rather than risk the world's largest oil producer going it alone.