Not doing things by half

Will it be a half or just a quarter? The City believes an interest rate increase from the Bank of England this week is a done deal, and all that's now in question is the size of the move. While nothing is inevitable, all the signs are that the Bank will tighten policy for a fifth time since November on Thursday, but despite the unexpected strength of manufacturing last month it is likely to err on the side of caution.

There are three reasons for sticking to the gradualist approach. The first is that that is the way the Bank has traditionally operated since being given operational independence by Gordon Brown. It has only ever put rates up in quarter-point steps (although it has occasionally cut them by half-a-point), and there would have to be a good reason for abandoning this strategy. The second is that pushing rates straight from 4.5% to 5% might suggest that the Bank's monetary policy committee considered itself to be behind the curve. There was some concern in the spring that that was the case, which explains the rises in May and June. But having acted decisively then, the MPC feels no need to provide what would still be a jolt to the markets.

The final reason is that the Bank is unsure about the quality of the data on which interest-rate decisions are based. Overall, it is trying to meet inflation by marrying the UK's growth rate with its long-term potential supply rate, but this requires a judgment about whether the economy is operating at, above or below trend. Looking through the fog, the MPC's best guess is that there is no spare capacity remaining in the economy, and as a result growth cannot continue at 3.7% a year without inflation picking up. But with growth figures subject to considerable revision, it is happier to fine-tune rather than risk overkill. The bottom line is that if the Bank thinks rates need to go up by half-a-point, we'll get a quarter-point downpayment on Thursday, with the remainder in September if the economic data remains strong.

Hidden meaning


HBOS chief executive James Crosby is not known for his gaffes. He's a careful professional, with a reputation to protect. What fun, then, to see the man tripped up playing the smarty-pants.

At last week's interim results meeting of the Halifax/Bank of Scotland group, Crosby had to have a quotable, on the record statement about its rival Abbey and whether HBOS might launch a counter bid. He came up with: "The idea that the big four banks will dive in to ensure some kind of competition inquiry without any realistic expectation that they can get through - that does not seem appealing to us." Perfect, Crosby probably thought, an empty quote that will satisfy the media.

In its splendid isolation, Crosby's statement revealed nothing about HBOS's intentions towards Abbey. Neither did it seek to mislead. The HBOS man was simply saying that the big four banks - namely HSBC, Royal Bank of Scotland, Barclays and Lloyds TSB - face serious competition issues in contemplating taking Abbey over.

But given the number of official reviews of the banking sector over the past five or six years, this was a statement of the bleeding obvious. Since HBOS is not a member of the traditional clearing bank cartel, it may be that Crosby assumed the outside world would assume - by extension - that his bank might not face serious competition issues. But the outside world assumed the opposite. Crosby's audience were well aware that a takeover of Abbey would take HBOS's share of the mortgage market to 35%. Under the Office of Fair Trading's operational guidelines, that is a dead-cert trigger for a competition commission referral.

So, outsiders reasoned, if Crosby doubts the big four would "dive in", the regulatory hurdles facing HBOS must be at least as onerous - hence last week's headlines suggesting HBOS was cool on an Abbey bid. The upshot of all this is that HBOS has been forced to show its hand at the earliest possible moment. And it was Crosby's fault.

Ploughman's hunch


Supermarkets are obliged these days to adhere to a DTI code of practice when dealing with suppliers. The perception persists, reinforced by Tesco's booming profits and rising numbers of farmers' markets, that the balance of power between supermarkets and farmers is unhealthy. A good moment, then, for Defra to study the effect of buying power on produce prices.

The report, quietly published on the department's website, is deeply disappointing. The preference of the authors, London Economics, for sitting on the fence is matched only by their love of the double negative. "One cannot therefore conclude that buying power was not an issue in the 90s," they state.

Their central claim - that the spread between farmgate and retail prices in Britain is not out of line with the rest of Europe - misses the point, as Liberal Democrat rural affairs spokesman Andrew George argued yesterday. "Defra bureaucrats need to get out more and ask farmers and producer cooperatives how they are being treated by supermarkets," he said.

He's right. Supermarkets themselves, who deeply resent their dreadful image on this issue, would probably also welcome a more meaningful study.