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Pause for thought

The governor of the Bank of England says inflation is here to stay and monetary easing must cease. If we thought the second half of 2007 and early 2008 were tough, then, according to Mr King, we ain’t seen nothing yet. Worse, these testing times seem likely to persist: the “Nice decade” is behind us and interest rate cuts are now officially shelved.

The stockmarket’s initial reaction to this was one of indifference. Not so the foreign exchange market, which saw the pound take a pummelling on the back of lower economic growth expectations. If the interest rate set by the BoE is considered the dividend payable by the currency, then the high-yielding pound is out of favour at present.

But it has been the weak sterling that has contributed to inflation and the toughening of the BoE’s stance. Remarkably, inflation data from the US, issued around the same time as King’s take on the domestic economic outlook, was more benign – and the dollar really has been weak over the past few years.

All this reaffirms my view that the short-term outlook for equities is too clouded to be certain that we will not see a return to the sort of levels at which we were languishing in March. The 15 per cent recovery we saw then injected some confidence back into the investor community but it takes only a few poor corporate statements for investors to run for cover. And if the Governor is right, the outlook for company profits has deteriorated.

In the US, forecasts of a fall of up to 20 per cent in earnings this year are common. This would not make the market significantly expensive but would see investors pause for thought. And pausing is just what the housing market is now doing. Speaking to a local chamber of commerce meeting where there were a number of estate agents, I learnt just what is happening in home sales and it is not wholly downbeat.

The bottom end of the market has undoubtedly been hit by the credit crunch but good quality properties are still holding their price and finding buyers. One agent pointed out, though, the overcapacity in the estate agency market. When you read that agents are closing offices and laying off staff, this may be no more than a slimming down of an industry grown fat.

Similarly, there is talk of 10,000 job cuts in the Square Mile. This is an impressive figure but still a modest proportion of the number employed in one of the UK’s most successful industries. Back in 1988, in the aftermath of the stockmarket crash, the opportunity was taken to squeeze out previous excesses. Much the same is happening now.

This is a real crisis though, and one that has our most senior banker endeavouring to lower people’s expectations. But if we cannot expect interest rate cuts until 2010, we will be into a general election before our hard-pressed population receives respite from the Government. Mr Brown and Mr King are likely to be talking before too long.

Brian Tora ( is principal of the Tora Partnership


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